Revolving loans: Overview, definition, and example
What are revolving loans?
Revolving loans are a type of credit facility that allows the borrower to borrow, repay, and borrow again up to a certain credit limit. Unlike traditional loans where a fixed amount is borrowed and repaid in set installments, revolving loans provide flexibility, as the borrower can access funds repeatedly as long as they stay within the credit limit. The most common example of revolving loans is credit cards, but they can also include lines of credit extended to businesses or individuals. Interest is typically charged on the outstanding balance, and the borrower is required to make periodic payments, which often consist of a minimum payment and interest.
Why are revolving loans important?
Revolving loans are important because they provide a flexible borrowing option for individuals and businesses that need ongoing access to funds without having to apply for a new loan each time they need money. This makes them ideal for managing cash flow, handling unexpected expenses, or funding short-term needs. For businesses, revolving loans help manage working capital by allowing them to access funds for inventory purchases, payroll, or other operational costs. They also provide the borrower with the option to pay down debt and borrow again, giving them greater control over their financing.
Understanding revolving loans through an example
Imagine a small business that has been approved for a revolving loan with a credit limit of $100,000. The business uses $50,000 of the available credit to purchase inventory for the holiday season. After generating sales, the business repays $30,000 of the borrowed amount. The remaining available credit is now $80,000 ($100,000 limit minus the $20,000 balance). The business can continue borrowing from the revolving loan as needed, up to the maximum credit limit, and only pay interest on the outstanding balance.
In another example, an individual has a credit card with a revolving credit limit of $5,000. The person spends $1,000 in a month. The minimum payment on the credit card is due, but they only pay $200. The remaining balance of $800 continues to accrue interest, and the person can borrow more money within the $5,000 limit as long as they continue to make payments and keep the balance within the allowed limit.
An example of revolving loan clause
Here’s how a revolving loan clause might appear in a credit agreement:
“The Borrower is granted a revolving loan with a credit limit of $500,000. The Borrower may draw on this facility at any time, subject to the terms of this Agreement. Repayments made by the Borrower will restore available credit, and the Borrower may continue to borrow up to the limit as long as the balance remains below the credit limit and interest is paid on the outstanding balance.”
Conclusion
Revolving loans offer borrowers flexibility in managing cash flow, as they allow for repeated borrowing up to a predetermined limit. Whether used for business financing or personal expenses, these loans provide ongoing access to funds without the need to reapply each time. With periodic repayments and interest charges, revolving loans can be a useful tool for managing short-term financial needs, but borrowers must be mindful of interest rates and repayment schedules to avoid excessive debt accumulation.
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.