Revolving commitment: Overview, definition, and example
What is a revolving commitment?
A revolving commitment refers to a type of credit arrangement where a borrower can borrow, repay, and borrow again up to a certain limit, without having to reapply for credit each time. This is common in credit facilities like lines of credit, credit cards, or business loans. The borrower can continuously access the funds as long as they stay within the approved limit and meet the terms of the agreement.
For example, a business with a revolving commitment may have access to a $100,000 line of credit. They can borrow $50,000, pay it back, and then borrow again, as long as the total borrowed amount never exceeds the $100,000 limit.
Why is a revolving commitment important?
A revolving commitment is important because it offers flexibility to borrowers. Unlike traditional loans that provide a lump sum with fixed repayment schedules, revolving credit allows borrowers to access funds when needed and repay them over time. This can be especially helpful for businesses or individuals with fluctuating cash flow or short-term financing needs.
For lenders, revolving commitments also offer a steady source of interest income, as borrowers are often charged interest on the outstanding balance. These arrangements can help build long-term relationships between borrowers and lenders.
Understanding revolving commitment through an example
Imagine a small business that has a revolving credit line with a bank. The business has been approved for a $50,000 revolving commitment. At one point, the business borrows $20,000 to cover unexpected expenses. After a few months, they pay back $15,000. They now have access to the remaining $15,000 from their original $50,000 limit. If the business needs to borrow more, they can do so up to the $50,000 limit, without reapplying for a new loan.
For another example, a credit card holder with a revolving commitment might have a $5,000 credit limit. They can use their credit card to make purchases, pay it off, and then make more purchases without needing to apply for a new loan as long as the total spending does not exceed $5,000.
Example of a revolving commitment clause
Here’s how a revolving commitment clause might look in a loan agreement:
“The borrower is granted a revolving line of credit up to a maximum of $200,000. The borrower may draw down funds, repay, and borrow again, as long as the total outstanding balance does not exceed the $200,000 limit. The line of credit will renew annually, subject to the lender’s review.”
Conclusion
A revolving commitment is a flexible and ongoing credit arrangement that allows borrowers to access funds repeatedly within a set limit. It helps manage cash flow, particularly for businesses, by providing access to capital when needed, and it offers lenders a consistent stream of interest income. Understanding revolving commitments is crucial for managing short-term financing needs without the hassle of reapplying for credit each time.
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.