Timmy's Timbers has just arranged a $300,000 line of credit with its banker for the next year. What does this mean for Timmy's Timbers?
A) Timmy's Timbers now has guaranteed access to up to $300,000, but it must pay a commitment fee on any unused portion of these available funds.
B) As long as its credit rating doesn't deteriorate, Timmy's Timbers can take out loans of up to $300,000 from the bank over the next year without having to negotiate new loan agreements each time it needs to borrow funds.
C) The bank now holds commercial paper issued by Timmy's Timbers that will be worth $300,000 plus interest when it matures. In exchange, the bank provides Timmy's Timbers with $300,000 of cash that it can use immediately or at any time over the next year.
D) Timmy's Timbers now has $300,000 more in cash in its bank account but must begin paying financing charges on these funds immediately.

Question

Quizplus · Accepted Answer

A line of credit is a pre-approved amount of borrowing that a business can use at any time during the specified period, without negotiation each time. Therefore, Timmy's Timbers can take out loans of up to $300,000 from the bank over the next year without having to negotiate new loan agreements each time it needs to borrow funds.

Timmy's Timbers Has Just Arranged a $300,000 Line of Credit