Bank Credit

Published Aug 22, 2023

Definition of Bank Credit

Bank credit is a type of loan that is provided by a bank to a borrower. That means it is a form of debt that is used to finance investments or purchases. Bank credit is usually provided in the form of a line of credit, which is a predetermined amount of money that the borrower can draw from at any time.

Example

To illustrate this, let’s look at a small business that needs to purchase new equipment. The business owner applies for a bank loan and is granted a line of credit of $50,000. This means that the business can draw up to $50,000 from the bank at any time. The business owner can then use this money to purchase the equipment they need.

Once the equipment is purchased, the business owner has to start repaying the loan. The repayment terms are usually determined by the bank and may include interest payments.

Why Bank Credit Matters

Bank credit is an important source of financing for businesses and individuals. It allows them to purchase goods and services that they would not be able to afford otherwise. That means it can be used to finance investments, start new businesses, or purchase large items like cars or houses.

In addition, bank credit is also an important source of liquidity for businesses. That means it can be used to cover short-term cash flow needs, such as payroll or inventory purchases.