In tough times or in an emergency there is a situation that people need money to overcome that situations at that time. Traditionally, people go to the bank or financial institutions and apply for a loan and the bank approves some set of amounts after verification. In that case, you use only up to some extent of the amount you have to pay interest on the whole amount. But this will not happen while taking the line of credit. You’ll be charged interest only on the amount that you used from the set of amounts approved by the bank. This acts as a credit card that is approved with a limit amount which you can use according to your need and pay the interest only on that particular amount. So here we’ll discuss all the details of a Line of Credit how it works and how to set up a line of credit in QuickBooks.
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What is a Line of Credit?
Basically, Loc (Line of Credit) is an agreement between the bank and the person who borrows money at their needy time. As a borrower, you have to apply for the LOC in the bank. The bank considers different parameters such as credit rating, mutual relationship between you and the bank, etc., and then approves LOC with the set amount. Like a loan, interest is also charged on the amount, but the main difference is you have to pay interest only on the amount you took out from the set limit. You can also use the rest of the money until it reaches the total set limit amount. Unlike personal loans it is variable.
It is like a flexible loan that disposed of the burden of interest paid on the whole amount in the traditional way of borrowing the loan. You can borrow the money until you reach the set limit amount. After repaying the amount you can borrow again. How it is used in QuickBooks is a matter of discussion so here we’ll get to know how to use QuickBooks.
What is a Line of Credit in QuickBooks?
The term Line of credit is referred to as a revolving account which is basically used by the business and the customers to withdraw the amount that they need for paying the payroll or fulfill the needs of the urgent requirements. It is similar to a loan where you have to repay with interest on the particular amount that the organization and the business used for their condition. It is like a lifeline of any business or organization because of the availability of instant funds.
What is the need to set up a line of credit in QuickBooks?
For the organization, the Line of credit is a boon or you can say lifeline, especially for small-scale companies and start-ups that confront delays in cash flow. At this time, companies fulfill their daily expense management and payroll by getting instant funding. Here is a list that gives you an idea of why to set up of line of credit in QuickBooks.
- Flexibility for using money according to the requirement.
- Easy cash flow system/ cash flow in and cash flow out is managed easily or you can say manage cash flow in QuickBooks easily.
- Utilize the money according to the requirements.
- Shift credit funds into a completely different account.
- Document interest charges
- Smooth and unpretentious Expense management
- Amplify business savings
Procedure: Set up a Line of Credit in QuickBooks
Setting up a line of credit in QuickBooks involves a few steps that ensure you can accurately track and manage your credit account. Here’s a step-by-step guide on how to set up a line of credit in QuickBooks Online:
Setting up a Particular Principle Account in QuickBooks
Follow the given steps
- Firstly go to the setting and and then choose Chart of Accounts.
- Now select the option “New”.
- After that select the drop-down menu in the Account type section and then select the current liabilities option.
- You have an option to add a new name to the account if you want.
- Now choose the option save and close.
- Check the transaction datewise and then press “Yes”.
Set up a Particular Expense Account for your Line of Credit
- For this, you have to select setting again and choose Chart of Accounts.
- Then the next step is to choose “New”
- Click on the Account type drop-down, and then select “Expenses”.
- Next, click on the Detail type drop-down and choose Interest Paid.
- You have the option to edit the name of the account if needed.
- Finally, select Close and Save.
How it works
The LOC process is the same as the bank loan but in Quickbooks, you have to just enter the credits to record the vendors’ refund. To register LOC there are many methods but journal entry is the best method, you just need to issue journal entries after finding the company. After these steps, you have to enter the details like the date of deposit, etc. In addition, you can also record the expense in the future.
How to track the Line of Credit
If you have set up your two accounts then with the help of LOC you can track transactions. To move credit funds into another account, you must make a transfer but make sure to keep a record of all your bills and expenses.
Pay with a paper check
Follow the given steps if you are sending a paper check to the bank or creditor.
- First of all, select the + New to add a check.
- Then under the Vendors, you have to select the check.
- Now you have to enter the name of the financial institution in the payee field.
- In the bank account dropdown list, you have to select the bank.
- After that, you have to select the Line of credit from the category field and then enter the principal amount you want to pay.
- Then the next step is to pay the interest, for this, you have to select the interest paid from the category.
- The final step is to click on save and close.
Pay with a debit card/credit card
If you want to pay with a debit card or a credit card to the bank then you can do:
- Record the repayment as an expense.
- When it comes to your bank feed categorize the expense.
FAQs
Q. Does QuickBooks offer a Line of Credit?
A. Yes, to get more funding alternatives QuickBooks Capitals’ partners offer small business loans and lines of credit. It helps small companies when they need it most with the instant fund availability for paying their payroll.
Q. What type of account should a line of credit be in QuickBooks?
A. It generally comes under the two types of accounts it is either current liabilities or long-term liabilities.
Q. What are the key differences between the Credit card and the Line of Credit?
A. If you are using a credit card to get cash you have to pay heavy interest rather than Loc but credit card also offers various cashback and reward programs but Loc does not. Interest rates are variable if you are using credit cards on the other hand there is a fixed interest rate for the Line of credit.