All the characteristics of a line of credit agreement

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Unformatted text preview: ry a zero loan balance for a certain period ensures that short-term loans do not turn into long-term loans. All the characteristics of a line-of-credit agreement are negotiable to some extent. Today, banks bid competitively to attract large, well-known firms. A 646 PART 5 Short-Term Financial Decisions prospective borrower should attempt to negotiate a line of credit with the most favorable interest rate, for an optimal amount of funds, and with a minimum of restrictions. Borrowers today frequently pay fees to lenders instead of maintaining deposit balances as compensation for loans and other services. The lender attempts to get a good return with maximum safety. Negotiations should produce a line of credit that is suitable to both borrower and lender. revolving credit agreement A line of credit guaranteed to a borrower by a commercial bank regardless of the scarcity of money. commitment fee The fee that is normally charged on a revolving credit agreement; it often applies to the average unused balance of the borrower’s credit line. EXAMPLE Revolving Credit Agreements A revolving credit agreement is nothing more than a guaranteed line of credit. It is guaranteed in the sense that the commercial bank assures the borrower that a specified amount of funds will be made available regardless of the scarcity of money. The interest rate and other requirements are similar to those for a line of credit. It is not uncommon for a revolving credit agreement to be for a period greater than 1 year.7 Because the bank guarantees the availability of funds, a commitment fee is normally charged on a revolving credit agreement.8 This fee often applies to the average unused balance of the borrower’s credit line. It is normally about 0.5 percent of the average unused portion of the line. REH Company, a major real estate developer, has a $2 million revolving credit agreement with its bank. Its average borrowing under the agreement for the past year was $1.5 million. The bank charges a comm...
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This document was uploaded on 01/19/2014.

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