Definition
An Evergreen loan is a type of revolving loan that is continually renewed, avoiding the need for the borrower to reapply each time a new loan is needed. Unlike a term loan, which has a set duration and payment schedule, an evergreen loan’s principle balance does not have to be paid off within a specified timeframe. However, interest payments are typically required periodically.
Key Takeaways
- An Evergreen Loan is a rolling, short-term loan arrangement that permits the borrower to maintain a line of credit as long as necessary, usually by regularly renewing the loan.
- This type of loan is generally used for operating purposes and allows companies to have access to funds when needed without the need for reapplication.
- The primary requirement for this line of credit is that the borrower must consistently pay the interest and maintain a good payment history to ensure the loan’s continuation.
Importance
Evergreen loans are important in the finance world as they provide continuous, revolving lines of credit which are essential for businesses and individuals for managing fluctuations in their cash flow or for unexpected expenses.
These types of loans do not have fixed payment terms.
Instead, the borrower is expected to make at least minimum periodic payments, which includes interest, and sometimes principal, to keep the line open.
This perpetual ability to draw, repay, and redraw funds allows borrowers to maintain their liquidity and gives more flexibility in managing their finances.
Furthermore, as long as the borrower meets the minimum payments and complies with the loan’s terms, the loan remains active, or ‘evergreen’. Thus, they play a crucial role in ensuring financial stability and flexibility.
Explanation
An Evergreen loan, essentially, is a financial tool designed to maintain a consistent line of credit for a borrower without a scheduled end date, hence the name ‘Evergreen’. It’s popularly utilized by businesses as it provides them with continuous, long-term access to funds without needing to reapply for a loan and without the burden of a substantial one-time repayment. The business can borrow, repay, and again borrow from this line of credit, providing a consistent source of capital to keep the company running or finance its growth.
An Evergreen loan plays a crucial role in company operation and expansion, serving as a safety net and encouraging financial fluidity. For example, a business may use it to cover fluctuating operating expenses, fund ongoing projects, or may need quick access to cash to seize a sudden business opportunity.
The limitless nature of an evergreen loan can also be particularly attractive to businesses operating in industries characterized by unpredictable sales cycles or periodic cash flow challenges. However, borrowers are generally required to make regular, typically minimum, payments to keep the loan ‘evergreen’. These payments include interest and possibly a portion of the principal.
Examples of Evergreen Loan
Personal Line of Credit: This is a type of evergreen loan where the consumer is offered a set credit limit to use for various personal needs. They have the flexibility to borrow as much or as little as they need. The borrowed amount is to be repaid over a set period of time. However, as long as the balance doesn’t exceed the credit limit, they are free to borrow again.
Credit Cards: Credit cards are also examples of evergreen loans. They offer a revolving credit line that can be used and repaid continuously, as long as you don’t exceed the approved credit limit and make a minimum payment each month.
Home Equity Line of Credit (HELOC): This is a type of evergreen loan that allows homeowners to borrow against the equity in their homes. Like a credit card, they can borrow as much or as little as they need until they reach their credit limit. As long as they continue making at least the minimum payments, they can continue to use the available balance, making it an evergreen loan.
FAQ – Evergreen Loan
What is an Evergreen Loan?
An Evergreen Loan, also known as a revolving loan or a standing loan, is a type of loan that allows the borrower to draw down, repay, and re-draw amounts over the life of the loan.
How does an Evergreen Loan work?
An Evergreen Loan works similar to a credit card. The borrower can borrow money up to a certain limit for a set period of time. Payments are typically made on a monthly basis and the loan can be renewed without going through the loan process again once the time period expires, hence ‘evergreen’.
What is the benefit of an Evergreen Loan?
The main benefit of Evergreen Loans is their flexibility. Borrowers only pay interest on the money they draw out, not the entire loan amount. This allows for more control over the expense of borrowing and gives the financial freedom to use as much or as little of the loan as necessary.
What is the difference between an Evergreen Loan and a Term Loan?
The main difference between an Evergreen Loan and a Term Loan is the duration and flexibility of the loan. A Term Loan has a set term length and requires regular repayments of both principal and interest. An Evergreen Loan has a renewable term and only requires interest to be paid during the term of the loan, giving the borrower the option to repay the principal as and when they choose.
Related Entrepreneurship Terms
- Revolving Loan
- Interest
- Principal Payment
- Loan maturity
- Line of Credit
Sources for More Information
- Investopedia: Known as one of the leading sources of financial terminology definitions and explanations.
- The Balance: Covers several finance topics including a variety of loan formats and uses.
- Corporate Finance Institute: Offers resources on a wide range of finance topics, including loans and credit structures.
- Bankrate: Provides information about personal finance, housing, investing, retirement, and more. Its content includes definitions of various finance and loan terms.
