Revolving advances: Overview, definition, and example
What are revolving advances?
Revolving advances refer to loans or credit facilities that allow the borrower to borrow, repay, and borrow again up to a specified credit limit. This type of financing is flexible, as the borrower has the ability to draw funds as needed, repay them, and then access the funds again without having to reapply for credit each time. Revolving advances are commonly associated with revolving credit lines, such as credit cards or business lines of credit, and are typically used for short-term financing needs.
For example, a business might have a revolving credit line that allows them to borrow up to $500,000, repay the amount over time, and then borrow again as needed.
Why are revolving advances important?
Revolving advances are important because they provide borrowers with flexible access to funds, offering a convenient solution for managing cash flow fluctuations or covering short-term expenses. This type of credit facility is especially useful for businesses or individuals who need ongoing access to capital but do not want to be tied to a fixed loan schedule. Revolving advances help businesses maintain liquidity and support their working capital needs while minimizing interest costs by only borrowing when necessary.
For borrowers, revolving advances provide flexibility and convenience, while for lenders, they can offer a predictable stream of interest income from the ongoing use of the credit line.
Understanding revolving advances through an example
Imagine a small business with a revolving line of credit of $100,000. The business borrows $30,000 to purchase inventory for a new product line. After a few months, the business generates enough revenue to pay back the $30,000. Once the debt is repaid, the business can borrow again from the remaining $70,000 as needed, making the credit line an ongoing source of capital.
In another example, an individual uses a credit card with a revolving balance. They make purchases up to their credit limit, repay a portion of the balance, and are then able to use the remaining credit again. This flexibility allows the individual to manage expenses while keeping interest costs in check.
Example of a revolving advances clause
Here’s how a revolving advances clause might appear in a contract:
"The Lender agrees to provide the Borrower with a revolving credit facility in the amount of [$credit limit]. The Borrower may draw on the facility at any time, repay amounts borrowed, and borrow again, subject to the terms outlined in this Agreement. The outstanding balance shall not exceed the credit limit at any time, and interest will be charged on the outstanding balance according to the rate specified."
Conclusion
Revolving advances provide borrowers with ongoing access to capital, allowing them to manage cash flow and meet short-term financial needs with greater flexibility. This type of credit is widely used by businesses and individuals alike for its convenience and adaptability.
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.