What is an evergreen loan?

An evergreen loan, also known as a revolving loan, revolving credit facility, or standing loan, is a loan that never goes away – it is renewed every year until the borrower no longer needs it. In this type of loan the principal does not have to be paid off by a certain date.

Instead of being contractually committed to a specific payment schedule, the borrower can withdraw money and pay it back as many times as necessary.

Most evergreen loans are short term lines of credit that are perpetually renewed, with the principal remaining outstanding for the long term. The borrower pays back, then uses it again and again, virtually indefinitely until the bank or debtor decide to cancel it.

Credit card loans are a type of revolving credit facility. Experts say it can be an expensive way to borrow money.

In most cases, as long as the borrower continues servicing the loan properly, the bank will not decide to cancel it.

Evergreen loans are often taken by companies that need working capital – money used to support their everyday functions. For example, a business may need funds to cover expenses while waiting for large invoices to be paid. It will use the revolving loan to get the money it requires to run the business and will pay the money back when its customers pay.

Evergreen loans are popular for people involved in real estate developments. The loan is used to get started, it is repaid as people start buying into the project, and then money is taken out again to finance further expansion.

Renewal criteria for an evergreen loan

Before deciding whether the loan can be renewed, the bank will determine whether the borrower can still service the debt by checking its updated financial statements if it is a company.

As far as the bank is concerned, the borrower’s income must exceeds its debts. It also re-examines the borrower’s collateral to make sure it would support the loan in the event of a default. Not all evergreen loans have collateral attached as security, this depends on the company’s financial strength, the size of the loan, and if it is an individual, his or her credit score.

Banks will not be keen to renew the loan if the balance is continuously close to the credit line limit. If the balance is close to the limit for two years, most likely the borrower is unable to pay back the debt.

Evergreen loans in personal finance

Credit cards and bank overdrafts are commonly used as evergreen loans. When the borrower hits the credit limit (maxes out), he or she will have to repay part of the loan in order to withdraw more money.

For borrowers they are useful types of personal credit because they do not need to reapply for a new loan each time they need to use it.

According to lse.co.uk/financeglossary, a revolving credit facility is:

“(A credit facility) enabling a firm to borrow up to a pre-specified amount usually over 1-5 years. As repayments of outstanding balances are made, the loan facility is replenished.”

Video – Revolving loans and credit cards

In this CNBC Africa video, Wikus Olivier of DebtSafe discusses revolving loans and credit cards (which are also a type of revolving credit).