What is the primary purpose of a line of credit?

The primary purpose of a line of credit is to provide ongoing access to short-term funds. A line of credit is a flexible loan arrangement with a financial institution that allows borrowers to withdraw funds as needed, up to a specified limit. This feature is particularly advantageous for managing fluctuations in cash flow, covering unexpected expenses, or financing short-term operational needs without incurring the higher costs or procedural delays associated with traditional loans.

Utilizing a line of credit enables businesses to borrow money only when necessary, which helps to optimize interest expenses, as interest is typically charged only on the amount utilized rather than the entire credit limit. This flexibility is advantageous for businesses that experience unpredictable cash flow or seasonal fluctuations in revenue, allowing them to maintain liquidity and operational continuity.

In contrast, the other options focus on uses or objectives that are not aligned with the primary nature of a line of credit. Financing long-term assets is generally better suited to term loans or leases, while increasing interest income pertains more to investment strategies than borrowing. Securing investor financing typically involves equity financing or the issuance of debt instruments rather than utilizing a line of credit. Thus, the function of a line of credit is distinctly to facilitate easy access to short-term funding as needs arise.