Revolving notes: Overview, definition, and example
What are revolving notes?
Revolving notes are a type of debt instrument where the borrower is allowed to borrow, repay, and borrow again, up to a specified credit limit, much like a revolving credit line. These notes are typically used for short-term borrowing needs and can be issued by businesses or financial institutions to raise capital. A revolving note typically includes an interest rate and a repayment schedule, but the key feature is the borrower’s ability to "revolve" the balance – borrowing and repaying as needed without having to reapply for a new loan every time.
Revolving notes are often used in situations where businesses need flexibility to manage cash flow, such as for working capital purposes or to cover temporary liquidity gaps.
Why are revolving notes important?
Revolving notes are important because they provide flexibility for borrowers to access funds as needed, without the need for reapproval or new agreements for each draw. This makes them an efficient tool for managing cash flow, allowing businesses to take out money when required and pay it back once they have sufficient funds. It also provides a cost-effective way for businesses to meet short-term capital needs, since they only pay interest on the drawn balance rather than the entire credit line.
For lenders, revolving notes provide an ongoing relationship with the borrower, often generating consistent interest payments over time. This type of note also allows lenders to adjust the available credit limit based on the borrower’s financial performance and needs.
Understanding revolving notes through an example
Imagine a company that has a revolving credit facility with a bank in the form of a revolving note for $500,000. The company can borrow money from the note as needed, paying interest only on the amount borrowed. For instance, if the company borrows $100,000 to cover a temporary cash flow shortfall, they would pay interest only on the $100,000 rather than the entire $500,000. Over time, as the company generates revenue, it repays the borrowed amount, and the available credit becomes replenished, allowing the company to borrow again.
In another example, a startup might use a revolving note to finance its working capital needs, drawing funds periodically as new opportunities arise or as cash flow fluctuates. The flexibility of the revolving note allows the startup to respond quickly to changing circumstances without being locked into a rigid repayment schedule.
An example of a revolving note clause
Here’s how a revolving note clause might appear in an agreement:
“The Borrower shall have the right to borrow up to the full principal amount of $500,000 under this Revolving Note, subject to the terms of this Agreement. Amounts borrowed under this Note may be repaid and re-borrowed from time to time, provided that the total outstanding balance at any time does not exceed the maximum credit limit. Interest on the outstanding balance shall accrue at an annual rate of [X]%, and payments shall be made monthly on the outstanding balance.”
Conclusion
Revolving notes are a useful financial instrument for businesses that require flexible access to short-term capital. They allow for borrowing and repayment on a revolving basis, providing the borrower with the ability to manage cash flow and financial needs efficiently. For lenders, revolving notes provide an ongoing relationship with the borrower, creating opportunities for consistent interest payments and adjustable credit limits. This type of note is especially beneficial for businesses with fluctuating working capital needs, offering a more flexible and convenient alternative to traditional loans.
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.