Revolving credit

A revolving credit arrangement sets a maximum available amount of credit, which a borrower can borrow against, pay down and borrow again, as needed. These arrangements are commonly used to fund the operating needs of a business. For example, a purveyor of Christmas ornaments needs to borrow money in order to build its inventory, sells the inventory in the months prior to the main holiday season, and collects cash immediately thereafter, which it uses to pay down the loan. A business must pay its lender a commitment fee, so that the lender is obligated to keep the funds available for use by the borrower. A variable interest rate is typically associated with a revolving credit arrangement, which may be several points above the prime interest rate. Revolving credit is most commonly used to fund short-term operational needs, as opposed to long-term capital needs (such as for the purchase of fixed assets).

Related Courses

Corporate Cash Management 
Corporate Finance 
Treasurer's Guidebook