Rollovers: Overview, definition, and example
What are rollovers?
Rollovers refer to the process of renewing or extending a financial agreement, typically a loan or investment, by transferring the principal or balance from one period or agreement to the next. In a loan context, a rollover occurs when the borrower either refinances the original debt or extends the maturity date without paying off the loan in full. In the context of investments, a rollover refers to reinvesting funds from a maturing investment (like a certificate of deposit or a bond) into a new one. Rollovers allow borrowers or investors to keep their funds active, often with a new term, while maintaining continuity.
In simpler terms, a rollover is when a borrower or investor decides to extend or reinvest their money rather than cashing it out.
Why are rollovers important?
Rollovers are important because they provide flexibility and continuity in financial arrangements. For borrowers, rollovers allow them to extend the term of a loan without having to repay the entire balance upfront, making it easier to manage cash flow. For investors, rollovers provide an opportunity to continue earning returns on their funds by moving them into new investments. In both cases, rollovers can help avoid disruptions in financial planning and offer a convenient way to manage maturing debts or investments.
For SMB owners, understanding how rollovers work can help manage business financing and investment strategies effectively, ensuring that cash flow and capital are continuously working for the business.
Understanding rollovers through an example
Let’s say your business took out a short-term loan that is set to mature in six months. Instead of repaying the loan in full, you negotiate a rollover with the lender, allowing the loan to be extended for another six months. The principal remains the same, and you don’t need to repay it immediately, giving you more time to manage your finances.
In the case of investments, imagine your business has a bond that matures. Instead of cashing out the bond, you choose to rollover the proceeds into a new bond, continuing to earn interest without interruption.
Example of a rollover clause
Here’s an example of what a rollover clause might look like in a loan agreement:
“The Borrower may, at its option, request a rollover of the outstanding principal amount of the Loan at the maturity date. The Lender may, in its discretion, agree to extend the loan term for an additional [X] months, subject to the same terms and conditions as outlined in this Agreement, unless otherwise agreed upon by the Parties.”
Conclusion
Rollovers offer a useful option for both borrowers and investors to extend the terms of loans or reinvest funds without disrupting their financial plans. For SMB owners, understanding and utilizing rollover options can help maintain smooth cash flow, avoid unnecessary payments, and maximize returns on investments. By negotiating favorable rollover terms, businesses can continue to manage their finances effectively and adapt to changing financial conditions.
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.