Answer:
Frank's Furniture needs short-term loans periodically to cover operating expenses prior to selling new shipments of furniture imported from abroad. To cover its short-term capital needs, it has established a line of credit, which is a loan approved before the money is actually needed.
Step-by-step explanation:
A line of credit is a flexible financing arrangement where a lender provides Frank's Furniture with a maximum loan amount, but interest is only charged on the funds used. This financial tool allows the company to access funds as needed, providing a financial cushion during periods of cash flow fluctuations or operational requirements.
Frank's Furniture can draw on the line of credit to cover expenses such as payroll, utilities, or other short-term needs before the arrival and sale of new furniture shipments. This proactive approach ensures that the company has the necessary liquidity to sustain operations without delays.