A revolving credit agreement is a legal commitment by a bank to extend credit up to a maximum amount. While the commitment is in force, the bank must extend credit whenever the borrower wishes to borrow, provided total borrowings do not exceed the maximum amount specified. If the revolving credit is for $5 million, and $3 million is already owing, the borrower can borrow an additional $2 million at any time. For the privilege of having this formal commitment, the borrower usually is required to pay a commitment fee on the unused portion of the revolving credit. If the revolving credit is for $5 million, and borrowing for the year averages $2 million, the borrower will be required to pay a commitment fee on the $3 million unused portion. If the fee is 1/2 percent, the cost of this privilege will be $15,000 for the year. Revolving credit agreements frequently extend beyond one year.
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