What is a Line of Credit Fee?

In a revolving line of credit , the borrower can make multiple borrowings up to a predetermined maximum loan amount. In exchange for this service, the lender charges the borrower an annual fee and a monthly servicing fee. The lender charges these fees because it has to reserve funds for the use of the borrower, and incurs costs to oversee the various line of credit transactions.

How to Account for a Line of Credit Fee

In a line of credit arrangement, both the lender and the borrower have to account for the related fees. The applicable accounting is as follows:

• Lender accounting . The lender recognizes the associated net fees or costs in income on a straight-line basis over the period of the line of credit. If the borrower cannot re-borrow from the line of credit upon paying off the line, recognize all remaining net fees and costs as of the payment date. If the line of credit includes a payment schedule, then account for the remaining net fees and costs as a yield adjustment over the remaining life of the loan.

• Borrower accounting . The borrower recognizes all interest expense related to the lending arrangement in the period incurred. In addition, any origination fees are initially recorded as a prepaid expense (asset), and then recognized proportionally as interest expense over the period of the lending arrangement.

Related AccountingTools Courses

Accountants' Guidebook

GAAP Guidebook

Example of Line of Credit Fee Accounting

Currency Bank enters into a one-year line of credit arrangement with a borrower, where the borrower can elect to convert the line of credit into a three-year term loan . Currency amortizes the net fees and costs associated with the line of credit over the combined period of the line of credit and term loan. The borrower elects to let the line of credit expire and pays off the remaining balance, without converting to a term loan, so Currency recognizes the remaining unamortized net fees and costs as of the expiration date.