What is an Evergreen Loan?
In the financial world, an evergreen loan is, as its name suggests, one that doesn’t go away. Essentially, an evergreen loan is a type of revolving loan. The borrower makes payments on the loan balance, based on the loan’s terms. As the principal balance on the loan is paid off, it can then be borrowed again.
There is a caveat, however. The lender must review an evergreen loan on an annual basis and determine if the borrower meets the qualifications for the renewal of the loan.
Ultimately, the lender and the borrower will continue the cycle with the loan indefinitely. Provided the borrower makes consistent and timely payments on the loan to pay it off, the lender will generally continue to renew the loan. Thus, it is referred to as an evergreen loan.
- An evergreen loan is a revolving loan that provides the borrower a line of credit that can be renewed indefinitely, provided the borrower consistently pays off the loan balance and meets other criteria.
- In addition to consistently paying off the evergreen loan, the individual’s financial statements must be examined to ensure sufficient income and, if collateral is on the table, the collateral must be valuable enough to secure the loan.
- The most common types of evergreen loans are revolving loans; however, evergreen letters (or notes) of credit are also popular.
Renewal Criteria for an Evergreen Loan
Again, a borrower must meet the annual criteria to be approved for the renewal of an evergreen loan. Listed below are several factors that a lender considers:
1. Financial statements
First, lenders look at a borrower’s financial statements. It is ultimately to ensure that the borrower can satisfy his or her debt (or the balance of the loan). The goal for the lender, when looking at the financial statements, is to examine any other past and present debts by the borrower, how they were repaid, and that the borrower’s income is sufficient enough to continue making loan payments.
2. Collateral/Need for collateral
For certain borrowers, collateral may be required to secure an evergreen loan. It depends on several factors but is specifically required for borrowers with lower income. The goal for the lender is to determine if the borrower’s collateral holds enough value to hedge the loan if the borrower defaults.
The lender would collect the collateral and sell it to recover the loss of the loan balance. Borrowers with solid finances generally aren’t required to provide any collateral.
3. Consistency of payments
Finally, one of the most critical pieces of criteria that a lender examines is how well the borrower’s been paying off the loan over the course of the year (and possibly previous years depending on if the loan’s been renewed in the past). As long as the borrower’s been consistently paying off the loan, the requirement is met.
The Most Common Types of Evergreen Loans
1. Revolving line of credit (LOC)
One of the most common types of evergreen loans is a revolving line of credit (LOC) given to the borrower, provided the borrower meets the various requirements to secure the loan. A revolving LOC is, by far, predominantly given to companies that need capital, or more specifically, working capital.
Consider the following example. Company A, which supplies bulk cleaning materials to other companies, is waiting on payment to come in for various orders. The evergreen loan is a line of credit that Company A can utilize as working capital, which allows it to cover the day-to-day expenses it incurs while it waits for customer payments to roll in. The company then pays the loan off once the money comes in.
2. Evergreen letter (or note)
Evergreen loans can be achieved in another way. A lender may offer an evergreen letter (or note). It is essentially a credit letter that the borrower secures to seek a loan elsewhere. The letter lets the loan provider know that in the event that the borrower cannot fulfill the loan obligation, the lender offering the evergreen letter guarantees it will cover whatever debt the borrower can’t satisfy. Similar to the loan, the letter can be indefinitely renewed up until the borrower no longer needs it.
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