Exploring Revolving Credit Agreements

A Revolving Credit Agreement is a legal contract between a bank and a customer, in which the bank promises to lend the customer up to specified, maximum amount during a specified period. The customer could be an individual or could be a multi-national corporation, and the amount of the credit limit could be small or could be quite large, but the principles of the agreement remain the same. Such an agreement provides for a line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is usually used for operating purposes, fluctuating each month depending on the customers current cash flow needs. Along with the commitment fee there is also usually interest expenses for corporate borrowers and carry forward charges for consumer accounts.

The following key provisions are important to the construction of a Revolving Credit Agreement:

Laying out the Parameters. The first provision should describe the nature of the bank-customer relationship, and describe the line of credit that is being created. This section might read: Bank A may extend credit to Customer B pursuant to this Revolving Credit Agreement, allowing the customer to access the credit from time to time, subject to a limitation on the outstanding balance of the credit accessed and without regard to whether the customer has previously accessed and repaid the credit. This revolving credit agreement may authorize the customer to access the credit extended by either or both of the following:

1. Purchasing goods or services from a seller by means of the bank's commitment to advance to the seller the payment for the goods and services purchased by the customer;
2. Obtaining an advance of funds by the bank or by another in reliance on the bank's commitment to pay the funds advanced to the customer.

Terms of the Loan. The agreement must then spell out the terms of the line of credit and what the bank plans to charge. (The maximum amount of interest a bank is allowed to charge is controlled by state and federal law, so check the relevant statute in your state to ensure compliance.) The agreement should specify the manner in which the bank will compute the loan balance on which interest and finance charges are assessed. A revolving credit agreement may permit the bank to charge a minimum monthly finance charge of one dollar for any month for which there is an unpaid balance on the customer's account.

Providing Monthly Statements. The bank must supply to its customer under a revolving credit agreement a statement as of the beginning or end of each period in which there is any unpaid balance on the customer's account, which period may be a calendar month or other regular period not in excess of thirty-one days. These statements should include:

1. The amount of the unpaid balance under the agreement at the beginning and end of the period;
2. The date and amount of each advance made by the bank for the account of the customer during the period;
3. The cash purchase price and the date of each purchase of goods or services with respect to which advances for the account of the customer were made during the period;
4. All payments made by the customer to the bank and any other credits to the customer during the period;
5. The amount of all charges made against the customer during the period;
6. A legend to the effect that the customer may at any time pay the unpaid balance without incurring further charges.

These are the main provisions that must be addressed in a typical Revolving Credit Agreement.

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