Revolving credit
is a type of credit that does not have a fixed number of payments, in contrast
to installment credit. Credit cards are an example of revolving credit used by
consumers. Corporate revolving credit facilities are typically used to provide
liquidity for a company's day-to-day operations. They were first introduced by
the Strawbridge and Clothier Department Store.
It is an
arrangement which allows for the loan amount to be withdrawn, repaid, and
redrawn again in any manner and any number of times, until the arrangement
expires. Credit card loans and overdrafts are revolving loans, also called
evergreen loan.
In this case-
- The borrower may use or withdraw funds up to a pre-approved credit limit.
- The amount of available credit decreases and increases as funds are borrowed and then repaid.
- The credit may be used repeatedly.
- The borrower makes payments based only on the amount he or she has actually used or withdrawn, plus interest.
- The borrower may repay over time (subject to any minimum payment requirement), or in full at any time.
- In some cases, the borrower is required to pay a fee to the lender for any money that is undrawn; this is especially true of corporate bank revolving-credit loans.
A revolving
loan provides a borrower with a maximum aggregate amount of capital, available
over a specified period of time. Unlike a term loan, the revolving loan allows
the borrower to draw down, repay and re-draw loans on the available funds
during the term of the note. Each loan is borrowed for a set period of time,
usually one, three or six months, after which time it is technically repayable.
Repayment of a revolving loan is achieved either by scheduled reductions in the
total amount of the loan over time, or by all outstanding loans being repaid on
the date of termination. A revolving loan made to refinance another revolving
loan which matures on the same date as the drawing of the second revolving loan
is known as a "rollover loan", if made in the same currency and drawn
by the same borrower as the first revolving loan. The conditions to be
satisfied for drawing a rollover loan are typically less onerous than those for
other loans.
A revolving
loan is a particularly flexible financing tool as it may be drawn by a borrower
by way of straightforward loans, but it is also possible to incorporate
different types of financial accommodation within it - for example, it is
possible to incorporate a letter of credit, a swingline (that is, a short-term
borrowing that is funded on one day's notice), or an overdraft within the terms
of a revolving credit loan. This is often achieved by creating a sublimit
within the overall loan, allowing a certain amount of the lenders' commitment
to be drawn in the form of these different facilities.
