A Running Account Credit Agreement (RACA) is a type of credit agreement between a borrower and a lender. The agreement allows the borrower to borrow funds on an ongoing basis, up to a predetermined credit limit, and to repay the funds as necessary. The credit limit is typically based on the borrower`s creditworthiness, financial standing, and the relationship they have with the lender. RACAs are commonly used in commercial transactions, where businesses require ongoing access to credit to meet their working capital needs.
The key characteristic of a RACA is that it allows the borrower to have a revolving line of credit. This feature means that the borrower can repeatedly borrow and repay from the credit line without having to reapply for the loan each time. The borrower can also choose to borrow the entire credit limit at once or borrow smaller amounts as and when needed.
RACAs usually have a fixed interest rate, which is calculated on the outstanding balance of the loan. The interest rate is usually higher than other forms of credit, such as a term loan, to account for the flexibility that the borrower enjoys. However, RACAs offer many advantages to borrowers, such as:
1. Flexibility: Borrowers can use the credit line as and when needed, without having to go through the lengthy approval process repeatedly.
2. Cost-effective: Borrowers only pay interest on the amount borrowed, rather than on the full credit limit.
3. Easy access: Borrowers can withdraw funds from the credit line through ATM cards, checks, or online banking services.
4. Smooth cash-flow management: Businesses can manage their cash flows more efficiently by using RACAs to meet their short-term financial requirements.
5. Improved credit ratings: Consistently using and repaying the credit line on time can boost the borrower`s credit score, making them a more attractive candidate for other credit facilities.
In conclusion, a Running Account Credit Agreement is a flexible financing option that allows borrowers to access credit on an ongoing basis. It is an excellent option for businesses that require additional funds to manage their working capital requirements, and where the need for credit is ongoing and unpredictable. RACAs offer several benefits to borrowers, including flexible access to funds, better cash-flow management, and improved credit ratings.
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