Requirements for a Revolving Credit Line

Obtaining a revolving credit line is important for business and other borrowers in need of a constant flow of credit. Revolving credit lines are used primarily by businesses to fund their day-to-day operations. A revolving credit line, such as a credit card, differ from installment loans.  With a revolving credit line, the borrower has access to a predetermine amount of cash, up to a limit, which must be repaid.  As the money is used, the available amount of credit is reduced.  When the amount borrowed is repaid, the credit limit is restored.

Borrower Must Meet Lender’s Credit Requirement

Taking out a revolving credit line requires the borrower to meet the credit requirements of the lender. Businesses with bad credit will find it impossible to qualify for revolving credit lines.  Businesses with good credit find it challenging with some lenders to qualify as well as lenders have tightened their lending requirements.

Demonstrating a Need for the Revolving Credit Line

Once a business or borrower meets the lender’s credit requirement, a need for a revolving line will need to be demonstrated. This is typically done by reviewing a business borrower’s cash flow and income and expense statements in order to determine the flow of cash and how financially stable the business is. This determination is important for the lender as it uses financial information to further qualify the borrower and determine the appropriate amount to extend as a revolving line.

Executing a Revolving Credit Agreement

When the lender determines the credit line amount and feels comfortable that the borrower can maintain the revolving credit properly, a revolving credit agreement is executed between the borrower and the lender.  This spells out the terms and conditions under which the credit line will be used.  It also sets the borrowing rate for any money used by the borrower and any penalties and fees that may be associated.

Requiring Collateral

In some rare or extreme circumstances, a lender may require that the business maintain a security or collateral account. The purpose of this account is to protect the interest of the lender against default or the borrower’s inability to pay back any money that is taken out from the credit line account. This assurance may be necessary for certain borrowers with lower credit ratings or businesses that have not established an adequate operational history to adequately judge its potential. This requirement may be temporary or used as a permanent guaranty that the lender will keep in place.