Procedure for revolving loan borrowing: Overview, definition, and example
What is the procedure for revolving loan borrowing?
The procedure for revolving loan borrowing refers to the steps and requirements involved when a borrower draws funds from a revolving credit facility, which is a type of loan that allows the borrower to access a predetermined amount of credit repeatedly. This type of loan is common in business financing and is used to manage short-term working capital needs. The procedure typically includes the process of requesting funds, determining the amount to be borrowed, and the conditions under which the borrower must repay the funds. Revolving loan facilities often have a specified credit limit and allow for borrowing and repaying funds multiple times as long as the outstanding balance does not exceed the credit limit.
For example, a business with a $500,000 revolving credit facility may borrow $100,000 to cover operational expenses, then repay $50,000 and borrow again, as long as the outstanding balance is within the $500,000 limit.
Why is the procedure for revolving loan borrowing important?
The procedure for revolving loan borrowing is important because it provides businesses with flexible access to funds as needed. Understanding the process ensures that both the lender and the borrower know the terms of borrowing, repayment, and interest charges. By establishing clear procedures, businesses can avoid misunderstandings or mismanagement of the loan, such as exceeding credit limits or failing to meet repayment deadlines. For lenders, the procedure ensures that the borrower adheres to the terms of the loan and repays borrowed amounts in a timely manner.
Additionally, the procedure for borrowing under a revolving loan often includes requirements for the borrower to maintain financial documentation and meet certain financial covenants, ensuring the loan is used responsibly and within the agreed-upon framework.
Understanding the procedure for revolving loan borrowing through an example
Imagine a company that has an approved $200,000 revolving credit facility with a bank. The company needs $50,000 to cover a temporary cash shortfall due to delayed customer payments. The company contacts the bank to request the $50,000. As part of the procedure, the bank verifies that the company is within its credit limit, confirms the terms of borrowing (interest rate, repayment schedule), and approves the loan. The company draws the $50,000, which is deposited into its account. The company then repays $25,000 within the agreed period, leaving the outstanding balance at $25,000.
In another example, a retailer with a revolving loan facility of $300,000 uses the credit to purchase inventory. After a few months, the retailer repays a portion of the loan, freeing up more credit to make additional purchases as needed. The process repeats as the retailer manages cash flow based on seasonal demand.
An example of a procedure for revolving loan borrowing clause
Here’s how a clause about the procedure for revolving loan borrowing might appear in a credit agreement:
“The Borrower may request advances under the Revolving Loan by providing written notice to the Lender specifying the amount to be borrowed, which shall not exceed the available credit limit at the time. Each borrowing shall be repaid according to the agreed-upon repayment schedule, with interest accruing on the outstanding balance at the rate specified in this Agreement. The Borrower shall provide updated financial statements to the Lender quarterly and notify the Lender of any material changes to its financial condition.”
Conclusion
The procedure for revolving loan borrowing is essential for managing the flexible borrowing and repayment process associated with revolving credit facilities. By outlining the steps for requesting funds, ensuring compliance with credit limits, and establishing repayment terms, businesses can effectively utilize revolving loans to manage short-term cash flow needs. Clear procedures help maintain financial discipline, ensure responsible borrowing, and prevent confusion or misuse of the credit facility, benefiting both borrowers and lenders.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.