Legal Definitions - Revolving credit facility

A revolving credit facility is a flexible lending arrangement that allows a borrower to repeatedly access funds up to a pre-approved maximum limit. Unlike a traditional loan that is disbursed once and then repaid, a revolving credit facility permits the borrower to draw money, repay all or part of the outstanding balance, and then borrow again from the amount that has been repaid. This cycle can continue indefinitely, provided the borrower maintains good credit and adheres to the terms of the agreement, as there is typically no set expiration date for the facility itself.

Here are some examples to illustrate how a revolving credit facility works:

• Personal Credit Card: Imagine Sarah has a credit card with a $5,000 spending limit. Over the month, she uses it to pay for groceries, gas, and an online purchase, accumulating a balance of $1,500. When her statement arrives, she pays $1,000 of the outstanding balance.

  This illustrates a revolving credit facility because: After her payment, her available credit immediately replenishes from $3,500 (her original $5,000 limit minus the $1,500 she owed) to $4,500 (her original $5,000 limit minus the remaining $500 balance). She can continue to use the card for new purchases up to this new available limit, demonstrating the ongoing, replenishable nature of revolving credit without needing to reapply for funds.

• Business Line of Credit: "Green Thumb Landscaping," a small business, secures a $50,000 line of credit from a bank to manage seasonal cash flow. In the spring, they draw $30,000 to purchase new equipment and hire temporary staff. By late summer, after completing several large projects, they repay $25,000 of the outstanding balance.

  This illustrates a revolving credit facility because: The $25,000 repayment immediately makes that amount available again for Green Thumb Landscaping to draw upon. If an unexpected repair is needed for a truck in the fall, they can access those funds without applying for a new loan, showcasing the continuous access and replenishment characteristic of a revolving credit facility for operational flexibility.