A revolving line of credit is an arrangement made between a company or an individual and a bank to borrow money on a short-term basis to meet temporary cash shortfalls. Think of it as a sophisticated credit card. Banks that issue a revolving line of credit usually charge an initiation fee to start the loan, and set a maximum for the amount borrowed. When the borrower draws on the credit, the bank will charge monthly interest on the outstanding balance. Often, the borrower’s assets secure the revolving line of credit. If the borrower is a company, the secured assets are usually such items as inventory or accounts receivable. For example, when accounts receivable are used as collateral, the bank will cap the total amount that can be borrowed to 80% of the total value of the accounts receivable that is less than 90 days outstanding. If inventory is used as the collateral, the bank might cap the borrowing amount to 80% of the inventory value at cost. The cap minimizes the bank’s exposure to risk of default. In both of these cases, the bank assumes the borrower will collect on the receivables, or sell the inventory in the near future, and use the funds to pay back the amounts borrowed from the revolving line of credit. Should the borrower fail to pay, the bank will foreclose on the secured assets and sell them to pay off the debt.