What it means
Unlike a term loan with a set schedule of instalments, an evergreen facility renews automatically unless one side ends it. The bank typically reviews the arrangement annually, checking financial statements and covenants, and confirms or withdraws the line rather than demanding the balance back.
This suits businesses whose funding need is permanent in aggregate even though it fluctuates. A distributor that always has stock on the shelves and invoices outstanding needs working capital every month of the year, so repaying a facility in full would simply mean borrowing it again.
Pricing has two parts. Interest is charged on the drawn balance, usually at a floating rate, and a smaller commitment fee is charged on the undrawn portion, because the bank must set aside capital for money it has promised but not yet lent.
The convenience carries a real risk. The lender's renewal is a decision, not an obligation, so a facility a business has treated as permanent for years can be reduced or withdrawn during the annual review if trading weakens or covenants are breached.
Many agreements also include a clean-down provision. The borrower must bring the balance to zero, or below a stated level, for a set number of consecutive days each year, which proves the facility is funding seasonal swings rather than quietly financing losses.
In practice
Real-world examples.
Example
A builders' merchant carries $3,000,000 of stock and needs more cash before the spring building season. It draws on its evergreen facility from February, repays through the summer as sales convert to cash, and never formally repays the line in full.
Example
A staffing agency pays contractors weekly but is paid by clients after 60 days. It uses an evergreen facility to bridge that gap continuously, with the drawn balance rising and falling as placements change.
Example
A food producer breaches an interest cover covenant after a poor harvest year. At the annual review the bank renews the facility but cuts it from $5,000,000 to $3,500,000 and raises the margin, forcing the producer to shorten payment terms with customers.
Formula
Calculation
Total annual cost = (average drawn balance x interest rate) + (average undrawn balance x commitment fee rate).
A wholesaler has a $2,000,000 evergreen facility. Over the year its average drawn balance is $1,200,000, the interest rate is 8%, and the commitment fee is 0.5% on the undrawn amount.
Average undrawn balance = $2,000,000 - $1,200,000 = $800,000.
Interest = $1,200,000 x 8% = $96,000.
Commitment fee = $800,000 x 0.5% = $4,000.
Total annual cost = $96,000 + $4,000 = $100,000.
Effective cost on money actually borrowed = $100,000 / $1,200,000 = 8.33%. The extra 0.33 percentage points is what the business pays for the right to draw the remaining $800,000 at short notice.Case study
Seen in the real world.
The following case is illustrative and fictional. Halverton Supplies, an invented plumbing wholesaler, had run a $2,000,000 evergreen facility with the same bank for eleven years. Management thought of it as part of the permanent capital of the business, and the average drawn balance sat around $1,200,000, costing roughly $100,000 a year in interest and fees.
The facility contained a clean-down clause requiring the balance to fall to zero for 30 consecutive days each year. For a decade Halverton met it comfortably after the autumn trading peak. Then a large contractor customer went into administration owing $480,000, and Halverton could not clean down.
The bank did not withdraw the line, but it did reprice it and require monthly management accounts and a personal guarantee from the two directors. The finance director's conclusion was that the facility had been mispriced as permanent capital in the company's own planning. Halverton subsequently refinanced $800,000 of the balance into a five-year term loan, so that only the genuinely seasonal element depended on an annual renewal decision.
Watch out
Common mistakes.
- Treating an evergreen facility as permanent capital. Renewal is at the lender's discretion and can be refused at the annual review.
- Using it to fund long-term assets. Financing a factory or a ten-year machine with a facility reviewable each year creates a serious mismatch between the life of the asset and the life of the funding.
- Overlooking the clean-down requirement until it bites. A business that cannot clear the balance for the required period may be signalling that it is funding losses rather than working capital.
Questions
People also ask.
Is an evergreen loan the same as a revolving credit facility?
They overlap closely; the distinguishing feature of an evergreen arrangement is the absence of a fixed final maturity, with renewal instead by periodic review.
Why do lenders charge a fee on money not borrowed?
Because a committed but undrawn line still ties up the bank's capital and liquidity, so it must be paid for.
Can a lender really cancel the facility?
Yes, subject to the notice provisions in the agreement, and covenant breaches usually give the lender the right to review terms immediately.
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