Evergreen Loan

Definition

An Evergreen loan is a revolving loan that does not have a fixed repayment schedule, but instead requires ongoing, typically minimum, payments to stay current. It is usually a line of credit that the borrower can tap into as needed and interest is typically only charged on the portion of the balance in use at a given time. This type of loan is most often used for operating purposes, taking on the form of credit accounts such as credit cards or business lines of credit.

Phonetic

The phonetics for the keyword ‘Evergreen Loan’ is: Evergreen: /ˈɛvərˌɡriːn/Loan: /loʊn/

Key Takeaways

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1. Evergreen loans are revolving credit agreements that allow borrowers to maintain balance over the long term. They typically involve credit cards and line of credit agreements which allow the customer to borrow funds repeatedly as long as their outstanding balance doesn’t exceed the credit limit.
2. The term “Evergreen” is derived from the fact that these loans are set to constantly renew, unlike other loans with a set expiry date for repayment. The loan remains ‘evergreen’ as long as the borrower keeps up with required payments and follows other conditions in the credit agreement.
3. In essence, an Evergreen loan provides customers with flexible terms and ensures an ongoing business relationship between the lender and the borrower. However, it is crucial for borrowers to manage this line of credit wisely, as misuse could lead to debt accumulation and deterioration of the credit score.

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Importance

An Evergreen loan is important in business finance as it provides a continuous line of credit for an indefinite period. This means businesses can rely on a consistent source of funding for their operations. The evergreen loan helps businesses manage their cash flow, meet their working capital requirements and fund any sudden or unexpected expenses. The lender does not require the principal amount to be paid off completely or by a specified date, but as long as the interest payments are made regularly, the loan remains in good standing. This helps reduce the risk of default and thereby helps maintain the financial stability of both the business and the lender.

Explanation

An Evergreen Loan serves a significant purpose in fulfilling the ongoing financial needs of a business entity or an individual. It offers a continuous source of credit over a long-term period without a designated date of maturity. This means businesses can rely on constant financial support for various operational requirements, such as inventory management, capital improvements, or working capital. The enduring nature of this line of credit ensures that companies have ready access to funds which they can draw, repay, and redraw as per their changing financial needs. Similarly, individuals often use Evergreen Loans with credit cards and overdraft accounts for recurring personal requirements or for emergencies. The idea behind such a loan is not related to a specific purchase or investment like a standard loan, but instead to always have a line of credit available when needed. In an ever-fluctuating market, having a financial cushion like this can be beneficial, whether to manage unexpected expenses, pay off higher interest debt, or invest in time-bound opportunities. By enabling flexible access to funds, Evergreen Loans serve as an essential financial tool for both businesses and individuals.

Examples

1. Home Equity Line of Credit (HELOC): A Home Equity Line of Credit is a typical type of Evergreen Loan. Borrowers can constantly draw from it, up to a certain limit, and repay it over time. As long as the credit line remains open and the borrower does not exceed the limit, there is usually no set payback period. Thus, it is ‘evergreen’. 2. Credit Cards: Credit cards are a prime example of evergreen loans. Here you have a pre-approved credit limit set by the credit card issuer. You can utilise the up to the assigned limit and pay it back in monthly installments or all at once. As long as you’re in the limit and pay the dues regularly, the loan would continue indefinitely.3. Revolving Business Lines of Credit: This is a credit facility extended to a business by a bank or financial institution. The business can borrow up to a certain limit, and as long as the limit is not exceeded and minimum payments are made regularly, the line of credit remains available for borrowing. These loans are ‘evergreen’ because they don’t have a specific payback date and the funds can continually be borrowed as long as the account stays in good standing.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Revolving Loan
• Line of Credit
• Interest Payment
• Principal Balloon Payment
• Credit Agreement

Sources for More Information

• Investopedia
• Corporate Finance Institute
• The Balance
• Wall Street Mojo