Revolving Credit

A Revolving Credit is an essential financial instrument that can play an important role for both companies and private individuals. In the dynamic world of the financial markets, this credit offers a flexible way of bridging short-term financial bottlenecks and ensuring liquidity. It allows unexpected expenses or investment opportunities to be dealt with without delay. In this article, we take a look at how this financing instrument works, its benefits and potential risks.

Revolving Credit Definition: What is an overdraft facility?

A Revolving Credit, also known as an overdraft facility, is a form of short-term credit line granted to a current account holder by a bank. It is a flexible credit facility that allows the account holder to overdraw their own account up to a certain, previously agreed limit. This form of credit is particularly useful for bridging temporary liquidity bottlenecks or covering unforeseen expenses. The interest on the amount of credit used is generally higher than for other types of credit and is only charged on the amount actually used.

The term Revolving Credit simply explained

The term 鈥淩evolving Credit鈥� comes from Italian and Latin. The word 鈥渃urrent account鈥� is made up of 鈥渃onto鈥� (Italian for 鈥渁ccount鈥�) and 鈥渃orrente鈥� (Italian for 鈥渃urrent鈥� or 鈥渇lowing鈥�). Together they mean 鈥渃urrent account鈥� or 鈥渃urrent account鈥�. The term 鈥渃redit鈥� comes from the Latin 鈥渃redere鈥�, which means 鈥渢o believe鈥� or 鈥渢o trust鈥�. A Revolving Credit is therefore a loan that is made available on a current account based on the bank's confidence in the account holder's ability to repay.

When are Revolving Credits used?

Revolving Credits are used in various situations to bridge short-term liquidity bottlenecks or to cover unexpected financial expenses. Here are some typical use cases:

Revolving Credit from private individuals

Bridging short-term liquidity bottlenecks:
- When salary has not yet been received but expenses need to be incurred (e.g. rent, bills).
Unforeseen expenses:
- Sudden repairs (car, house), medical emergencies or other unexpected costs.
Purchase of expensive goods:
- Purchasing household appliances or electronics when available credit is insufficient and the purchase cannot be postponed.
Avoiding overdue fines:
- Ensuring that bills are paid on time to avoid reminder fees and negative Schufa entries.

Revolving Credit from companies

Covering short-term financing gaps:
- Compensating for differences between incoming and outgoing payments, especially in the event of seasonal fluctuations or unexpected delays in incoming payments.
Pre-financing of projects:
- Financing of ongoing projects or orders before the revenue from these projects is realized.
Purchase of goods or raw materials:
- Purchasing stock or materials during periods of favorable prices, even if cash is currently insufficient.
Compensating for seasonal fluctuations:
- Ensuring liquidity in times of lower revenue to cover ongoing operating costs.
Emergency financing:
- Unforeseen expenses or crisis situations that require quick financial resources, such as machine breakdowns or other operational emergencies.

Revolving Credits offer a flexible and quick way of bridging short-term financial bottlenecks and ensuring liquidity. They are particularly useful in situations where funds are needed at short notice and quick repayment is expected. However, due to the higher interest rates, they should not be used for long-term financing.

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Revolving Credit Advantages and Disadvantages

This table provides an overview of the main advantages and disadvantages of a Revolving Credit and helps to weigh up whether this form of financing is the right choice for individual needs.

Advantages	Disadvantages
High flexibility: Easy and quick to use for short-term financing requirements.	High interest rates: Interest rates are generally higher than with other forms of credit.
Solvency: Increases liquidity and solvency in the event of unexpected expenses.	Dependence: Can lead to permanent use and financial dependence.
No fixed repayment installments: Repayments can be made flexibly, depending on the financial situation.	Cost transparency: The cost structure is often unclear, which can lead to unexpected costs.
Immediate availability: The credit line is available at any time, without having to be checked again.	Overdraft risk: Risk of unconsciously overdrawing the account, which incurs additional costs.
No earmarking: Can be used for various financial needs, without proof of use.	Short-term nature: Less suitable for long-term investments and financing.
Room for negotiation: Conditions can often be negotiated individually with the bank.	Creditworthiness-dependent: The amount of the loan and the interest rates depend heavily on the borrower's creditworthiness.

How does a Revolving Credit work?

A Revolving Credit works as a flexible line of credit linked to a current account, allowing the account holder to overdraw their account up to an agreed limit. Here is a detailed explanation of the process:

Establishment of the credit:
- The account holder applies to their bank for Revolving Credit.
- The bank checks the applicant's creditworthiness and sets a credit limit that is available on the current account.
- An interest rate is agreed for the credit line utilized.
Utilization of the credit:
- As soon as the account holder spends more money than is available in their current account, the Revolving Credit is automatically activated.
- The account balance becomes negative and the account holder can overdraw up to the credit limit.
- The credit can be used for various purposes, e.g. for unexpected expenses, payments or short-term liquidity bottlenecks.
Interest calculation:
- Interest is only charged on the amount actually used and not on the entire credit limit.
- Interest is calculated daily and usually debited to the account monthly.
- The interest rate for Revolving Credit is usually higher than for other forms of credit.
Repayment:
- The account holder can repay the overdrawn amount in full or in part at any time by clearing the account.
- There are no fixed repayment installments or terms; repayment is flexible according to the account holder's financial means.
- As soon as the account is balanced again, no further interest is charged and the Revolving Credit can be used again.
Costs and fees:
- In addition to interest, additional charges may apply, e.g. commitment fees or overdraft interest if the agreed credit limit is exceeded.
- It is important to check the conditions of the Revolving Credit carefully to avoid hidden costs.

The account holder can clear a negative balance at any time by making cash receipts or deposits, and interest will be charged accordingly. A Revolving Credit offers high flexibility and quick availability of funds, but is less suitable for long-term financing due to the higher interest rates. It is ideal for short-term, unforeseen expenses and to ensure liquidity.

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How high can a Revolving Credit be?

This table provides a clear overview of the factors that influence the amount of a Revolving Credit, as well as typical credit limits for personal and business accounts.

Factor	Influence on credit limit	Typical amount for private accounts	Typical amount for business accounts
Creditworthiness of the account holder	Good creditworthiness leads to higher credit limits.	Higher with a good credit rating	Higher with a good credit rating
Income and financial situation	Higher income leads to higher credit limits. Higher income	1,000 鈧� - 10,000 鈧�, typically 2-3x monthly net income	10,000 鈧� - 100,000 鈧� or more
Bank guidelines	Each bank has its own guidelines for credit limits.	Variable depending on bank	Variable depending on bank
Type of account	Business accounts often have higher credit limits than personal accounts.	1,000 - 鈧�10,000	鈧�10,000 - 鈧�100,000 or more
Example private customer	Employee with 鈧�3,000 net income could receive 鈧�6,000 - 鈧�9,000	鈧�6,000 - 鈧�9,000	N/A
Example business customer	Small company with 鈧�50,000 turnover could receive 鈧�50,000 or more	N/A	鈧�50,000 or more

Important terms relating to Revolving Credit

Terms relating to Revolving Credit

Term	Explanation
Credit limit	The maximum amount that the account holder may overdraw.
Overdraft interest	The interest rate charged on the overdrawn amount.
Debit interest	The interest rate charged by the bank for the use of the Revolving Credit.
Account balance	The current balance of the current account, which can become negative if the Revolving Credit is used.
Credit limit	The amount that can be used at any time within the credit limit.
Credit check	The assessment of the account holder's creditworthiness that is carried out before an Revolving Credit is approved.
Borrower	The person or company using the Revolving Credit.
Lender	The bank or financial institution providing the Revolving Credit.
Current interest	The calculation of interest on a daily basis, depending on the amount of credit drawn and the duration of use.
Repayment	The repayment of the loan amount drawn down, which can be made flexibly and without a fixed repayment schedule.
Overdraft	The agreed credit limit within which the account may be overdrawn.
Tolerated overdraft	An amount in excess of the credit limit that is tolerated in the short term, usually at higher interest rates.
Credit period	The period over which the Revolving Credit is utilized.
Overdraft	Another term for Revolving Credit, often used in retail banking.
Liquidity	The ability to have sufficient funds available at all times to meet payment obligations.

This table provides an overview of the most important terms relating to Revolving Credit and their meaning.

Calculate Revolving Credit

To calculate the cost of a Revolving Credit, i.e. the interest costs, we need the loan amount, the interest rate and the days of use. Finally, it must be divided by the 365 days of the year.

Revolving Credit Formula

The following formula can be used to calculate the costs of a Revolving Credit or the interest costs within it:

The variables stand for:

Credit amount: The amount you draw from the Revolving Credit.
Interest rate : The annual interest rate charged by the bank for the Revolving Credit (in decimal form, e.g. 5% = 0.05).
Days of use: The number of days on which the credit amount is used.

Revolving Credit Example

Let's assume you have a loan amount of 鈧�1,000 at an interest rate of 10% and use this loan amount for 30 days.

Interest costs = 鈧�1,000 x 0.10 x 30 / 365 = approx. 鈧�8.22

In this example, the interest costs for using the Revolving Credit for 30 days are around 鈧�8.22.

Revolving Credit: Fees & Interest

This table provides an overview of the typical fees and interest that can be charged on a Revolving Credit.

Fee/Interest	Description	Typical amount
Debit interest	Interest on the amount of credit utilized	5% - 15% per year
Commitment interest	Interest on the unused portion of the credit line	Rarely charged, typically 0.1% - 1% per year
Overdraft interest	Additional interest if the credit limit is exceeded	1 % - 5 % higher than the regular debit interest rate
Processing fees	One-off fee for setting up the Revolving Credit	鈧�50 - 鈧�100 or more, depending on the bank
Account maintenance fees	Fees for maintaining the account if a Revolving Credit facility is set up	Monthly or annually, variable depending on the bank
Additional costs	Other possible costs, e.g. for account statements or special services	Variable, depending on the bank

Revolving Credit - Inherently expensive?

Revolving Credit can be inherently expensive, and here are some reasons why.

Overview: Reasons for an expensive Revolving Credit

The following diagram shows an overview of the reasons for an expensive Revolving Credit.

Explanation: Reasons for an expensive Revolving Credit

Revolving Credit can be expensive, especially if it is used frequently and for long periods of time. It is important to only use this credit for short-term financial bottlenecks and to repay it as quickly as possible to avoid high interest costs. Account holders should also be aware of the terms and conditions of their Revolving Credit and consider alternative financing options if they need long-term financing.

High Interest Rates

Revolving Credits usually have higher interest rates compared to other forms of credit such as installment loans or mortgages. This interest is calculated on the actual amount drawn down and can be significant, especially if the loan is used over longer periods of time.

Additional Fees

In addition to the debit interest, other fees may be charged, such as processing fees, account management fees or overdraft interest if the credit limit is exceeded. These additional costs increase the total cost of using the credit.

Compound Interest Effect

As interest is calculated daily and debited to the account monthly, the compound interest effect can become noticeable. This means that interest can be charged on interest that has already accrued, which further increases the costs.

Lack of fixed Repayment Installments

The flexibility of repayment can mean that the loan amount remains unused for a long time. Without fixed repayment installments, the debt can remain outstanding for longer periods of time, leading to higher interest costs.

Overdraft Interest

If the agreed credit limit is exceeded, overdraft interest may be incurred, which is even higher than the regular debit interest. This further increases the costs and can lead to a considerable financial burden.

Differences between Revolving Credit and Loans

This table gives a clear overview of the main differences between a Revolving Credit and a Loan and helps to decide which financing instrument is best suited to different needs.

Characteristic	Revolving Credit	Loan
Purpose	Short-term liquidity protection	Financing of larger, usually long-term purchases
Flexibility	Very flexible, available at any time	Less flexible, fixed terms and repayment modalities
Interest rate	Higher, variable	Lower, usually fixed
Repayment	No fixed installments, repayment flexible	Fixed installments, regular repayment
Availability	Immediate availability up to the credit limit	Payment in one lump sum or as required
Cost structure	Interest only on the amount used, but usually higher interest rates	Fixed interest over the term
Credit check	Yes, but usually less strict than for loans	Yes, strict check of creditworthiness and collateral
Term	Unlimited, as long as within the credit limit	Limited, fixed term
Use	For short-term, unforeseen expenses	For planned, larger investments
Contractual agreements	Less formal, usually part of the current account agreement	Formal loan agreement with specific conditions

How is a Revolving Credit repaid?

Repayment of a Revolving Credit is flexible and without a fixed repayment schedule. Here are the main features and steps for repaying a Revolving Credit:

Flexibility of repayment
- No fixed installments: Unlike installment loans, there are no fixed monthly repayment installments with a Revolving Credit. The account holder can repay the amount drawn down at any time and in any amount.
Automatic repayment
- Incoming money: Any money received into the current account, e.g. salary, bank transfers or deposits, is automatically used to repay the overdrawn amount. This reduces the outstanding loan amount and therefore also the daily interest.
Partial repayments
- Partial repayments: The account holder can pay partial amounts into the account at any time to reduce the negative balance. This can be done by bank transfer or cash deposit, for example.
Interest calculation
- Daily interest calculation: Interest is calculated daily on the amount drawn down and is usually debited to the account monthly. Repayments reduce the outstanding loan amount and therefore also the daily interest.
Full repayment
- Balancing the account: As soon as the account holder pays sufficient funds into their account, the entire overdrawn amount is cleared. From this point onwards, no further interest will accrue.
Account movements
- Regular account checks: It is advisable to regularly check the account balance and account statements to keep track of the outstanding loan amount and the interest accrued.

Repayment of a Revolving Credit is very flexible and is made through automatic and voluntary deposits into the current account. It is important to monitor the account balance regularly and make repayments as soon as possible to minimize interest costs.

FAQ

When is a Revolving Credit worthwhile?

A Revolving Credit is worthwhile if you need to bridge financial bottlenecks at short notice and flexibly, for example in the event of unexpected expenses or temporary liquidity bottlenecks, and you are sure that you can quickly make up the amount to avoid high interest costs.

How high should the Revolving Credit be?

The Revolving Credit should be around two to three times as high as your monthly net income in order to be able to react flexibly to short-term financial bottlenecks.

What are the costs of a Revolving Credit?

With a Revolving Credit, debit interest, possibly overdraft interest if the limit is exceeded and sometimes account management or processing fees are charged.

What is the difference between an Overdraft Facility and a Revolving Credit?

An overdraft facility is for private customers and a Revolving Credit is for business customers, both allow the account to be overdrawn up to a certain limit.

What is the difference between Supplier Credit and Revolving Credit?

A supplier credit is granted by suppliers by giving you a payment term, while a Revolving Credit is provided by the bank to overdraw your account up to a certain limit.