What Is the Revolving Credit Agreement?
The term revolving credit, or a revolving account, is the credit report of an account basing on its credit limit that has been set by the lender to the borrower. This helps in determining the number of changes within the specified credit limit and the amount to be paid every month. Generally, credit cards are considered examples of such revolving credit. A revolving credit agreement is a contract between the lender and borrower for the revolving credit on a monthly basis within the provided credit limit.
Why Is a Revolving Credit Agreement Required?
A Revolving credit agreement is also called the credit line in case the customer commits to paying the fees to the bank or financial institution for the borrowing of money. This credit is used by the borrower at his convenience. This agreement for the revolving credit is required for operational purposes. It maintains clarity between the lender and the borrower regarding the terms and conditions of the agreement. In case of any disputes, the matter between the borrower and lender can be settled in an appropriate manner.
How to Draft a Revolving Credit Agreement?
The process of drafting a revolving credit agreement has been provided below:
- Mention the names and address of the lender and borrower along with their contact details
- Mention the terms and conditions of the revolving credit agreement
- Details of the credit limit and how it will be used
- Details of the offers if any
- Mention the date of issue and expiry of the revolving credit
- Mention the due date of payment, amount of payment, late fee charges, penalties of the grace period if any
- Mention the details of the conduct of the lender and borrower according to the governing laws
- Details of the restrictions and prohibition
- Waiver of liabilities
- Warranties and representations by both the parties
- Payment of additional costs and statutory fees
- Rights and responsibilities of the banker and the client
- Method of availing the credit facility
- Activities prohibited through use of the credit
- Confidentiality clause and exceptions to such clause
- Disclosures to the statutory bodies
- Liability of the bank in taxation and reporting
- Jurisdiction and governing laws
- Mention the date of renewal if any
- Termination of the contract
What Are the Pros and Cons of Revolving Credit Agreement?
The following are some of the advantages of the revolving credit agreement;
- One of the most significant advantages of revolving credit agreement that you can use the fund whenever you require within a predetermined manner; there can be no misuse of funds in any form or manner.
- This agreement for the revolving credit is required for operational purposes. It maintains clarity between both the lender and borrower regarding the terms and conditions of the revolving credit
- In case of any disputes, the matter between the borrower and lender can be settled in an appropriate manner legally without any complications.
The following are some of the disadvantages of the revolving credit agreement;
- Sometimes the agreement becomes flexible, and the terms and conditions become very rigid.
- The borrower has to pay more interest as compared to the amount he actually used.
- The legal disputes always backfire the borrowers, and the document sometimes considered partial.
Important Terms to Be Included in a Revolving Credit Agreement
The following are the details of the items that are mentioned in a revolving credit agreement;
- Names of the borrower and Lender
- Address of the borrower and lender with telephone numbers along with emails if any
- Credit Limit Amount
- Date of issue of Revolving Credit
- Date of Expiry of the Revolving Credit
- Tenure of the Revolving Credit
- Process and Methods of Termination of Revolving Credit
- Date of Renewal if any
- Details of the terms and conditions
- Mode of Payment
- The due date for Payment
- Late fee Charges
- Penalties if any
- Grace Period
- Warranties and representations
- Waiver of liability
- Acknowledgment of terms and conditions
- Liability of taxation
- Responsibility in case of fraud or misuse of funds
- Governing law
What Happens in Case of Violation?
There are different provisions for the violation of the revolving credit agreement, which depends on the current situation. When a borrower violates the terms and conditions of the agreement, he may be penalized or charged with a fine for nonpayment of the dues by the lender. In extreme cases, the lender can also terminate the agreement for the non-performance of the promise by the borrower and subsequently can file a lawsuit against the borrower.
On the other hand, the borrower can also sue the lender in case of unjustified penalties and charges on the revolving credit account. However, there can be different modes of recourse to resolve a dispute between the lender and the borrower that completely depend on them on how to deal with it.
There can be a number of circumstances that constitute violation of the agreement on the part of both borrowers and lenders. In most cases, the borrower violates the agreement, and the lender takes legal action against him/her. In such cases, the lender sends written notice to the borrower for the nonpayment of dues and later files a lawsuit in the court.
Today, in this competitive world, it is necessary to get the entire document legally binding to avoid any sort of dispute. This agreement for the revolving credit is required for operational purposes and to maintain clarity between both the lender and borrower regarding the terms and conditions of the revolving credit. Accordingly, disputes between the borrower and lender can be settled in an appropriate manner legally without any complications.
In this case, generally the party availing credit has to incur a commitment fee and then is allowed to use the credit when needed. A well-drafted and impartial revolving credit agreement clearly articulates the terms and conditions of the credit and aims at protecting the interest of both the debtor and creditor. As this facility involves financial transactions, adequate care should be taken while negotiating and documenting the agreement on terms such as amount of loan, repayment plan and term, interest rates, any penalty clause, and grievance redressing mechanism. Once the agreement is finalized, both the parties should follow it in letter and spirit to maintain cordial and long term business relations.
[Also Read: Credit Agreement]
Sample for Revolving Credit Agreement
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