Revolving credit advances: Overview, definition, and example
What are revolving credit advances?
Revolving credit advances refer to funds that a borrower can draw upon from a revolving line of credit, up to a predetermined limit, and then repay, only to borrow again as needed. This type of credit is commonly associated with credit cards or business lines of credit, where the borrower can use the credit repeatedly as long as they don’t exceed the credit limit. Unlike a traditional loan, which has a fixed repayment schedule, revolving credit advances provide flexibility because the borrower can access funds as needed and pay them back at their own pace, as long as they meet the minimum payment requirements.
In simpler terms, revolving credit advances let you borrow money, pay it back, and borrow again, just like having a credit card or business line of credit.
Why are revolving credit advances important?
Revolving credit advances are important because they offer flexibility to businesses and individuals who need access to funds on a continuous basis. This type of credit is useful for managing cash flow, covering unexpected expenses, or financing short-term needs without having to apply for a new loan each time. For SMBs, having a revolving line of credit can help smooth out fluctuations in cash flow, enabling the business to keep operations running smoothly even when payments or revenue are delayed.
For businesses, revolving credit advances provide access to funds without the rigid repayment structure of traditional loans, allowing for greater financial flexibility and responsiveness to immediate needs.
Understanding revolving credit advances through an example
Imagine your business is approved for a $50,000 revolving line of credit with a bank. In one month, you draw $10,000 from the line of credit to cover a short-term cash flow gap. After receiving payment from a client, you repay $5,000. The next month, you can borrow up to $45,000 again (since you’ve repaid some of the balance). The key is that as you pay back what you borrow, the credit becomes available again to be used when needed.
In this case, revolving credit advances provide your business with access to funds that are replenished as you repay, making it a flexible financing tool.
Example of a revolving credit advances clause in a business agreement
Here’s an example of what a "revolving credit advances" clause might look like in a loan agreement:
“The Borrower is granted a revolving line of credit in the amount of $100,000, subject to the terms of this Agreement. The Borrower may draw advances up to the credit limit at any time during the term of the agreement, and the amount drawn may be repaid and redrawn as long as the total balance does not exceed the credit limit. Interest shall accrue on the outstanding balance at a rate of [X]%, and the Borrower agrees to make monthly payments according to the agreed-upon schedule.”
Conclusion
Revolving credit advances are a flexible financing tool that allows businesses and individuals to borrow money up to a set limit, repay it, and borrow again as needed. For SMB owners, having access to a revolving line of credit can provide the financial flexibility to manage cash flow, handle unexpected expenses, and fund business operations without the need to apply for new loans repeatedly. By understanding how revolving credit works, businesses can use it effectively to navigate fluctuating financial needs while maintaining control over borrowing and repayment.
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.