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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
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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