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Q.How does a revolving line of credit work?
A.First, the borrower will give the lender a security interest in its receivables and/or inventory as collateral to secure the loan. This security interest creates the borrowing base for the revolving line of credit. As the receivables are paid, the cash is turned over to the lender to pay down the loan balance. When the borrower needs additional money, the borrower can request another advance. The lender will manage the revolving credit facility and the related collateral to offer the borrower the largest possible loan amount at any given time. Because the borrower's customers are generally not notified of the assignment of the accounts to the lender, the borrower continues to service its own receivables.
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