Line of Credit (hereinafter the “LOC”) refers to an arrangement between a bank and a customer, under which a customer may access a certain loan amount at any time, by using funds not exceeding the maximum amount agreed between the parties. The main purpose of the LOC is to attract additional financing for the main business operations. The main advantage of the LOC is its flexibility, as the customer may request a certain amount but does not necessarily has to use all of the said amount, whereas whilst acquiring a loan, a customer has to repay a certain lump sum of money within a fixed period. Consequently, the interest due is only the interest for the amount actually withdrawn. The customer then is able to repay the funds at his discretion, i.e. the whole amount withdrawn or in parts.
The LOC may be either secured or unsecured, unsecured LOC are those not secured by collateral and usually are subject to higher interest rates, whereas secured LOC are those for which a collateral is provided by the customer. In Cyprus the banks usually provide the LOC in the form of a revolving credit line, and the loans are granted in individual tranches, the amount and the repayment period stems from the agreement of the parties.