Revolving Credit

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 “Revolving Credit” comes from Italian and Latin. The word “current account” is made up of “conto” (Italian for “account”) and “corrente” (Italian for “current” or “flowing”). Together they mean “current account” or “current account”. The term “credit” comes from the Latin “credere”, which means “to believe” or “to trust”. 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

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

Revolving Credit from companies

1. 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.
2. Pre-financing of projects:
   • Financing of ongoing projects or orders before the revenue from these projects is realized.
3. Purchase of goods or raw materials:
   • Purchasing stock or materials during periods of favorable prices, even if cash is currently insufficient.
4. Compensating for seasonal fluctuations:
   • Ensuring liquidity in times of lower revenue to cover ongoing operating costs.
5. 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.

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:

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.

An overdraft facility is primarily based on creditworthiness, income or economic situation, the bank's guidelines, and the type of account.

For personal accounts, the credit limit is usually between €1,000 and €10,000, often around two to three times the monthly net income.

Business accounts generally receive significantly higher limits – often from €10,000 to €100,000 or more, depending on turnover and company size.