What is a Revolving Credit?

Published by Thomas Herold in Banking, Corporate Finance

'Revolving Credit' is explained in detail and with examples in the Banking edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Revolving Credit refers to lines of credit that customers draw on and then make payments on to their creditors. In order to have such a facility, the debtor must pay a commitment fee. This enables them to utilize the funds on an as-needed basis. Such a facility is typically deployed for operating expenses. It would therefore vary every month according to the present day cash flow requirements of the customer. Both individuals and corporations alike are able to take out these revolving lines of credit.

An agreement would be established upfront between the bank and the customer. Such a contract would guarantee the maximum potential amount that the bank will loan out to the client. Besides the initial commitment fee, there will naturally be interest costs for the corporate borrowers. These are called carry forward charges when the accounts are set up for consumers.

Banks and other financial institutions will contemplate a number of factors concerning the borrower and its ability to repay such a line before these revolving credit lines become issued. Where individuals are concerned, this means that his or her current income, credit score, and stability of employment will all be evaluated. Where organizations and corporations are concerned, the bank will typically review the income statement, balance sheet, and cash flow statement before making its final decision on approval and maximum line amount.

For those business entities and individuals who suffer from commonplace fluctuations in non-anticipated expenses and cash balance fluctuations, this revolving credit can be crucial and even lifesaving. They provide flexibility, versatility, and convenience, though this comes at a cost. The price for this is a more expensive interest rate which banks and lending institutions levy for revolving credit than they do on more traditional installment types of loans. Many times, this revolving credit facility will come alongside interest rates which are variable and can be quickly adjusted as appropriate.

The credit limit proves to be the highest dollar amount which the financial institutions will allow the borrower to draw. While there are many different examples of revolving credit facilities in the market place today, the most frequently cited ones are the personal lines of credit and the home equity lines of credit. These are also called HELOCs.

It is important to understand the differences between revolving credit and installment loans. Installment loans typically involve a pre-determined and –set number of payments which will be made on a monthly or quarterly basis over a fixed amount of time. By contrast, revolving funds only involve interest payments along with fees which are applicable per the contract established between the actual bank and the client.

When an individual or corporation receives this revolving credit line, it means that a customer has been pre-approved for receiving a loan. It is more convenient to use than taking out loans again and again, as one does not need to have his credit reevaluated or a new loan application taken every time they draw upon the revolving facility funds. This is why revolving facilities were created for smaller loans that are shorter term in nature. With more massive sized loans, the banks will want a better laid out structure that comes complete with installment payments.

There are differences between business credit cards and revolving lines of credit. No physical credit card is necessary with revolving credit lines. Also revolving lines do not require a preset purchase or amount. This credit can be transferred into the company or personal account for whatever reason they wish. This makes the revolving facilities more like cash advances with funds immediately available upfront and without questions asked regarding the purchase. The interest rates on revolving facilities are also commonly substantially less than are those associated with even business forms of credit cards.

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The term 'Revolving Credit' is included in the Banking edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.