What Is Backup Credit?

Malcolm Tatum

Backup credit is a term used to identify alternative options for credit that can be activated in the event that a main source of credit is unavailable for a short period of time. Credit of this type may be utilized as the result of some sort of natural disaster or political situation that temporarily suspends access to the usual and typical line of credit, allowing a company to continue operations with little to no inconvenience or interruption in production. A backup credit source may also be used in situations where the main credit line has been exhausted.

Credit cards may be used as a form of backup credit.
Credit cards may be used as a form of backup credit.

Sometimes referred to as a parallel line of credit, backup credit can take on a number of different forms. In some cases, the secondary credit is a bank assurance for a line of credit that can be activated at the request of the debtor. In this scenario, the financial institution has essentially pre-qualified and established the credit line for the customer but holds it in an inactive state until the client wishes to being making use of the resource. This means that if the company’s main credit line is temporarily unavailable for any reason, this secondary credit source is activated and allows the business to make use of the credit line for as long as necessary.

In some cases, backup credit has to do with a financial institution backing a commercial paper issued by a client. Since papers of this type are normally associated with customers who have excellent credit, the degree of risk that the institution assumes by providing this type of assurance or backing is kept to a minimum. The end result of this type of backing is that vendors and others are more willing to work with the issuer of the paper, since it is backed so firmly by an institution that is considered sound. As a result, even if the typical and usual credit resources engaged by the company are temporarily unavailable or are currently at their maximum, the business can still use the backup credit to fulfill obligations and generate the revenue stream necessary to eventually settle the outstanding balances on its credit accounts.

In a sense, even individual consumers may create some sort of backup credit. This may involve pre-qualifying for a loan at the local bank, or a strategy that involves securing some other type of funding that can be invoked when an emergency arises. For example, the consumer may qualify for a signature loan at a local bank, making it easy to obtain funds to help defer medical bills after an emergency or help with living expenses during a prolonged period of illness.

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