What Does a Revolving Credit Agreement Mean

Revolving credit agreement is a financial arrangement between a lender and borrower that allows the borrower to access credit on an ongoing basis up to a predetermined limit. This type of credit agreement is commonly used by individuals, small businesses, and corporations to fund ongoing expenses and maintain cash flow.

The key feature of a revolving credit agreement is that it is not a one-time loan. Instead, the borrower can continuously draw on the credit line as needed, up to a certain limit. The borrower is only required to make payments on the amount borrowed, and can repay the outstanding balance at any time. This flexibility allows borrowers to manage their cash flow more effectively and can be particularly beneficial for businesses with unpredictable income streams.

There are two types of revolving credit agreements: secured and unsecured. A secured revolving credit agreement requires the borrower to provide collateral, such as real estate or other assets, to secure the credit line. This reduces the lender`s risk and can result in a lower interest rate. An unsecured revolving credit agreement does not require collateral, and typically has a higher interest rate as a result.

Revolving credit agreements can be structured in various ways, depending on the needs of the borrower. Some common examples include:

– Credit cards: A credit card is a type of revolving credit agreement that allows the borrower to make purchases up to a predetermined limit. The borrower is required to make minimum payments each month and can carry a balance from one month to the next.

– Lines of credit: A line of credit is a type of revolving credit agreement that provides the borrower with access to funds up to a certain limit. The borrower can draw on the line of credit as needed, and is only required to make payments on the amount borrowed.

– Overdraft protection: Overdraft protection is a type of revolving credit agreement that is linked to a checking account. If the account balance falls below zero, the borrower can access a credit line to cover the shortfall. The borrower is typically charged a fee for this service, in addition to interest on the amount borrowed.

In conclusion, revolving credit agreements are a flexible and convenient way for borrowers to access credit on an ongoing basis. Whether it`s a credit card, line of credit, or overdraft protection, these agreements can provide businesses and individuals with the financial resources they need to manage cash flow and meet ongoing expenses. As with any financial arrangement, it`s important to carefully review the terms and conditions of a revolving credit agreement and only borrow what you can afford to repay.