Business – 10.2 Analysis of published accounts – Liquidity ratios | e-Consult
10.2 Analysis of published accounts – Liquidity ratios (1 questions)
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A line of credit provides flexible, short‑term financing that can be drawn upon as needed.
- Advantages:
- Immediate access to funds improves cash availability.
- Interest is paid only on the amount drawn, not the full limit.
- Can be renewed annually, offering ongoing liquidity support.
- Disadvantages:
- Interest rates may be higher than long‑term borrowing.
- Borrowing limits can be reduced or withdrawn if the lender’s risk assessment changes.
- Frequent use can lead to a reliance on external financing, increasing financial risk.
Thus, while a line of credit can quickly resolve cash shortfalls, it must be managed carefully to avoid excessive cost and dependency.