Evergreen Loan

The Evergreen loan is a short-term loan that is permanently rolled over. A bank might provide an evergreen loan if the company cannot repay the loan without disturbance to its trading operations. Return payment of the loan principal would not be expected so long as the company is going concern. The bank would have to feel self-confident, however, that the company could repay the loan if necessary from the decommissioning of the assets being financed by the loan. Depending on the financial strength of the borrower and the quality of the assets being financed, evergreen loans might be secured or unsecured. The loan may be evergreen where no repayment term is agreed in respect of the capital at the outset of the loan (B. Coyle 2000, s. 47 - 48).

How an Evergreen Loan works

Evergreen loans can take many forms and might be offered through varying types of banking products. It is possible to distinguish the two most common evergreen loan products offered by credit issuers:

• credit cards
• checking account overdraft lines of credit

Evergreen loans can be used by both businesses and consumers. They are a handy type of credit because they revolve, meaning users do not need to reapply for a new loan every time they need money. Evergreen loans provide borrowers with monetary flexibility but require the ability to regularly make minimum monthly payments. Evergreen lending reduces the bank's flexibility to answer to new credit demands from the real sector of the economy because over time an increasing proportion of the bank's resources become assimilated in the original evergreen loans. Higher interest rates increase rather than decrease the number of evergreen loans demanded since higher interest rates involve additional borrowing for their payment. Under these conditions, even solvent borrowers can be relatively secured to interest-rate changes. The transition from the bank and business solvency to insolvency go ahead under inexorably rising real interest rates (T. Killick 2005, s. 314).

Minimum Monthly Payment

Minimum Monthly Payment is the lowest amount a customer can pay on their revolving credit account per month to keep in good standing with the credit card company. The amount of the minimum monthly payment is calculated as a small percentage of the consumer's total credit balance (T. A. Durkin, G. Elliehausen, M. E. Staten, T. J. Zywicki 2014, s. 27 - 28).

Available Credit

Available credit is the untapped portion of credit available for customers on a revolving credit account. N. Orkun Akseli in his literary work describing available credit as the difference between the total credit limit and the amount that has been retained for acquired and interest (N. O. Akseli 2013, s. 4-16).

Examples of Evergreen Loan

• A revolving credit line is an example of an evergreen loan. A revolving credit line is a type of loan that allows a company to borrow up to a predetermined limit. Repayment is not required until the entire loan is used, and additional funds can be borrowed up to the limit as needed.
• An overdraft facility is another example of an evergreen loan. An overdraft facility allows a borrower to withdraw more money from their bank account than they have available in their balance. The borrower pays interest on the amount borrowed and must repay the overdraft within a certain period of time.
• A merchant cash advance is an example of an evergreen loan. A merchant cash advance is a short-term loan that is secured against a business's future credit or debit card sales. The loan is repaid through a percentage of the business' daily sales until the loan and fees are paid in full.
• A line of credit is another example of an evergreen loan. A line of credit is a loan that allows the borrower to draw up to a predetermined amount and make interest-only payments until the loan is paid off. The borrower can draw on the loan repeatedly until the entire amount of the loan is used.

Advantages of Evergreen Loan

An evergreen loan provides a number of advantages for borrowers, such as:

• Flexibility in repayment terms: An evergreen loan offers the flexibility to extend the repayment period without having to reapply for the loan. This can provide a more stable cash flow for businesses that experience seasonal fluctuations.
• Lower interest rates: As the loan is continuously rolled over, the borrower may benefit from lower interest rates compared to traditional loans.
• Increased cash flow: Evergreen loans are typically unsecured, meaning there is no collateral required. This allows for increased cash flow for businesses, as there is no need to tie up assets as collateral.
• Reduced paperwork: As the loan is rolled over, there is no need to submit new paperwork each time the loan is renewed. This can help to reduce paperwork and associated costs.

Limitations of Evergreen Loan

An Evergreen Loan comes with several limitations. These include:

• The bank may require a higher interest rate on the loan due to the risk of non-repayment.
• The bank may require the borrower to provide collateral or other security for the loan, as well as a personal guarantee from the borrower.
• The bank may also require regular financial reviews of the borrower to ensure that the borrower can still meet its obligations.
• The loan may be limited to a certain amount or length of time, and the borrower may need to reapply every time the loan is renewed.
• An evergreen loan can be expensive, as the borrower will be paying interest over an extended period of time.
• The loan may be subject to certain restrictions or conditions, such as limits on the amount of money that can be borrowed or the types of assets that can be used as collateral.

Other approaches related to Evergreen Loan

In addition to Evergreen Loan, there are several other approaches that can be used by a bank in order to facilitate the repayment of loans. These approaches include:

• Asset-based lending, where the bank offers loans secured by collateral such as equipment, inventory, accounts receivable, and other assets.
• Factoring, where the bank advances funds to a company against its accounts receivable.
• Leasing, where the bank leases equipment to the company, and the company pays the bank for the use of the equipment.
• Equity financing, where the bank provides cash investments to the company in exchange for ownership or a share in the company.

In conclusion, there are several alternative approaches that a bank can take in order to facilitate the repayment of loans. These approaches include asset-based lending, factoring, leasing, and equity financing. Each has its own advantages and disadvantages, and the best approach will depend on the particular situation of the company.

Evergreen Loan — recommended articles

Non current liability — Customer deposits — Packing credit — Credit Facility — Debt extinguishment — Swingline loan — Quick assets — Lombard loan — Unsecured Note

References

• Akseli N. O. (2013), Availability of Credit and Secured Transactions in a Time of Crisis, Cambridge University Press
• Coyle B. (2000), Framework for: Credit Risk Management, Global Professional Publishing
• Durkin T.A., Elliehausen G., Staten M. E., Zywicki T.J. (2014), Consumer Credit and the American Economy, Oxford University Press
• Kiarelly Godoy de Araujo D., Barata Ribeiro Blanco Barroso J., Gonzalez R. B. (2017), Loan-to-value policy and housing finance: effects on constrained borrowers, "BIS Working Papers", No. 673
• Killick T. (2005), The Flexible Economy: Causes and Consequences of the Adaptability of National Economies, Routledge
• Pawłowska M. (2015), Changes in the size and structure of the European Union banking sector – the role of competition between banks, "NBP Working Paper ", No. 205
• Shrestha P. K. (2012), Banking Systems, Central Banks and International Reserve Accumulation in East Asian Economies, "Economics, The Open-Access, Open-Assessment E-Journal", No. 48

Author: Patryk Kozioł