A bank operating loan (also called a line of credit) is a short-term, flexible loan that a business can use as needed to borrow up to a pre-set amount of money.
Bank operating loans are convenient for bridging gaps between the points when accounts payable are settled and accounts receivable are collected.
A company must make monthly interest payments on any money it borrows through its bank operating loan, and can pay down the balance over time out of its cash flow.
Often secured by inventory and accounts receivable, bank operating loans are considered “demand” loans, meaning the lender can demand full repayment at any time. To ensure it will be repaid, the bank will often include a claim on the company’s inventory and accounts receivable as part of the loan agreement. This makes bank loans “secured.”
Bank operating loans appear under liabilities on the balance sheet. They are considered current liabilities because they must be paid within a current 12-month operating cycle.
More about bank operating loans
The excerpt below shows where bank operating loans appear on a company’s balance sheet along with a variety of other current liabilities. Each type of loan or credit has its own payment terms.