Five year credit agreement is a legal commitment between a financing institution like bank and a loan customer according to which the financing institution agrees to provide a certain maximum amount of loan for a period of five years. But this is a special case of loan as there is no certain condition that borrower must actually withdraw the loan amount at any point of time. The borrower is set free to withdraw the loan amount in parts at any point of time over the period of five years; that is, the duration of the loan.
This loan is secured by the borrower’s inventory or any receivables. This type of arrangement is always done in advance and both the parties enter into the lender borrower relationship even before the borrower needs money. This sort of arrangement provides the borrower with the flexibility of withdrawing money whenever the need arises. For example, a newly established firm can apply for this loan to settle its monthly payroll requirements till the time it becomes financially stable.
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