A revolving promissory note is a written promise to repay borrowed funds under a flexible credit arrangement, where the balance the borrower pays down becomes available to borrow again up to a set maximum. The note fixes a credit limit, an interest rate or formula, and a maturity date, and it lets the borrower draw, repay, and redraw repeatedly during that period. Businesses use these notes to cover uneven cash-flow needs without applying for a new loan every time, and private lenders use them to hold an ongoing lending relationship inside a single governing document.
How the Revolving Cycle Works
The defining feature is that repaid principal replenishes the line. If a note carries a $100,000 limit and the borrower draws $40,000, the remaining available credit is $60,000. When the borrower repays $20,000 of that principal, available credit climbs back to $80,000. Interest accrues only on the outstanding balance, not the full limit, so the cost of capital tracks actual usage rather than the size of the facility.
The lender maintains a running ledger of every draw and every payment, tracking the current outstanding balance, accrued interest, and remaining capacity. Most agreements require the borrower to submit a written or oral draw request before the lender releases funds. Some notes allow a same-day draw with a phone call; others require written notice days in advance. The cycle continues until the maturity date or until one of the parties triggers a termination event.
How It Differs From a Term Loan
A term loan delivers a lump sum on day one and follows a fixed repayment schedule. Once you pay down $10,000 of a term loan, that $10,000 is gone from the facility. A revolving note lets you borrow it back tomorrow.
That difference reshapes the interest math. Term loans compute interest against a set amortization schedule, so total interest can be forecast from the start. Revolving notes compute interest on the daily outstanding balance, so total cost depends on how much of the line the borrower actually uses and for how long. The tradeoff is flexibility against predictability.
Core Provisions the Note Should Cover
A well-drafted revolving promissory note settles several points that otherwise generate disputes later:
- The maximum credit limit, which caps total borrowing at any point and defines the lender’s exposure.
- The interest rate and calculation method, including whether the rate is fixed or tied to a benchmark and when it adjusts.
- Draw procedures: how the borrower requests funds, how much notice is required, and any minimum draw amount.
- Repayment terms: when interest payments are due, whether any minimum principal payment is required, and any amortization schedule.
- The maturity date, when the revolving feature ends and the full outstanding balance becomes due.
- Default triggers, meaning the specific events that constitute a breach.
- An acceleration clause allowing the lender to demand the entire outstanding balance after a default.
- A collateral description, if the note is secured, along with the lender’s rights over the pledged assets.
One point often gets misstated: most revolving promissory notes are not negotiable instruments under Article 3 of the Uniform Commercial Code. UCC Section 3-104 requires a promise to pay a “fixed amount of money,” and a revolving balance fluctuates with each draw and repayment.1Cornell Law Institute. UCC 3-104 Negotiable Instrument Revolving notes also typically cross-reference a separate credit agreement for key terms, which further disqualifies them. They are enforceable as ordinary contracts under state law, and any security interest in collateral is governed by UCC Article 9.
Interest Rates, Benchmarks, and Day-Count Methods
A revolving note carries either a fixed rate or a variable rate tied to a benchmark. Since the transition away from LIBOR, the Secured Overnight Financing Rate has become the dominant benchmark for commercial lending. SOFR measures the cost of overnight borrowing collateralized by Treasury securities, and lenders add a spread on top of it to set the borrower’s rate.2Federal Reserve Bank of New York. Secured Overnight Financing Rate A note might read “SOFR plus 2.50%,” meaning the rate moves with the benchmark while the spread stays constant. Fixed rates are more common in smaller private arrangements where both sides prefer certainty.
The day-count convention decides how daily interest is calculated, and it changes the total bill. Three methods appear most often:
- 30/360 treats every month as 30 days and the year as 360. It is the simplest and generally the most borrower-friendly.
- Actual/365 divides the annual rate by 365 and multiplies by the actual days in each month. It runs slightly higher than 30/360 in months with 31 days.
- Actual/360 divides the annual rate by 360 to get a daily rate, then multiplies by the actual days elapsed. Because dividing by 360 produces a larger daily rate, this method yields the highest effective interest for the borrower.
The gap between Actual/360 and Actual/365 adds up on a large balance held for months. Confirm which convention the note uses before signing, because lenders don’t always flag it during negotiations.
Fees Beyond Interest
Two other charges commonly show up in a revolving facility.
An unused commitment fee, sometimes called an unused line fee, compensates the lender for keeping capital available that the borrower hasn’t drawn. It typically runs between 0.25% and 1.0% annually on the undrawn portion of the limit. On a $500,000 facility where the borrower has drawn $200,000, a 0.50% unused fee applies to the remaining $300,000 and costs $1,500 per year. Borrowers who plan to use only a fraction of the line should read this number carefully, because an oversized facility can be more expensive than it looks.
Late fees apply to missed or overdue payments and are stated as either a flat amount or a percentage of the missed payment. The specific figure lives in the note itself. Many notes also impose a default interest rate several points above the standard rate once a payment is past due, which creates a much stronger incentive to stay current than a one-time late charge.
Securing the Note With Collateral
Many revolving notes are secured by business assets, equipment, inventory, or accounts receivable. Pledging collateral gives the lender the right to seize and sell those assets on default, which lowers the lender’s risk and usually the borrower’s interest rate.
To protect its priority, the lender files a UCC-1 financing statement with the appropriate state office. The public filing puts other creditors on notice. Without it, the lender’s claim is unperfected, meaning other creditors, including a bankruptcy trustee, may take priority in a dispute. UCC Article 9 specifically permits a single security agreement to cover “future advances,” so the collateral continues to secure new draws under the revolving facility without a fresh filing each time.
Filing fees for a UCC-1 vary by state and generally fall between $5 and $60. The bigger issue is getting the collateral description right: too narrow leaves assets unprotected, too broad may not hold up. The filing also creates a lien that appears on the borrower’s credit profile and can affect the ability to pledge the same assets elsewhere.
Personal Guarantees
When the borrower is a business entity, lenders often require one or more owners to sign a personal guarantee. The guarantee creates a separate obligation for the individual to repay the debt from personal assets if the business defaults.
That changes the risk picture for the guarantor. If the business fails, the lender can pursue the guarantor’s personal bank accounts, real estate, and other assets. Guarantors should read whether the guarantee is capped at a dollar amount or covers the full obligation plus fees and collection costs. A negotiated cap, or a “burn-down” that reduces the guarantee as the business hits performance milestones, can limit personal exposure.
What Happens at Maturity
When a revolving note reaches its maturity date, the revolving feature stops and the full outstanding balance typically becomes due. This catches some borrowers off guard, especially those who have been treating the facility as semi-permanent working capital.
Three paths are common. The borrower can pay the remaining balance in full. The parties can negotiate a renewal that extends the revolving period for another term, and some agreements include auto-renewal provisions that push the maturity date out by a year unless one side gives written notice inside a specified window. Or the balance can convert into a term loan on a fixed repayment schedule, giving the borrower more time to pay down the debt without the ability to take new draws. Conversion is negotiated at origination and written into the credit agreement, so a borrower who wants that safety net has to ask for it upfront.
Refinancing takes time. Waiting until the final month before maturity leaves the borrower with weak leverage in negotiations with the lender.
Default Triggers and Lender Remedies
Default provisions reach further than missed payments. Typical triggers include failing to provide required financial statements, breaching a financial covenant such as a minimum debt-service coverage ratio, allowing a lien on pledged collateral without the lender’s consent, or filing for bankruptcy. The note should spell out each trigger specifically.
Once a default occurs, remedies escalate quickly. The lender can freeze the line and refuse new draws. If the borrower does not cure within any applicable grace period, the lender can invoke the acceleration clause and declare the full balance immediately due. On a secured note, the lender can also move to seize and liquidate the collateral. These remedies are cumulative, meaning the lender can pursue them in combination rather than picking one.
Default provisions are almost always negotiable at origination and nearly impossible to negotiate once a default has occurred. Reasonable cure periods and a narrow definition of default events are worth the time upfront.
When Federal Consumer Rules Apply
Whether federal lending regulations reach a revolving promissory note depends on who the borrower is and what the funds are for. Regulation Z, which implements the Truth in Lending Act, requires lenders to disclose annual percentage rates, finance charges, and payment terms for consumer credit.3Consumer Financial Protection Bureau. 12 CFR Part 1026 – Truth in Lending (Regulation Z) Credit extended primarily for a business, commercial, or agricultural purpose is exempt from Regulation Z entirely.4eCFR. 12 CFR 1026.3 Exempt Transactions Because most revolving promissory notes are used for business working capital, the exemption applies to the majority of these agreements.
For the minority that involve consumer credit, the Fair Credit Billing Act adds protections. The lender must acknowledge billing complaints promptly, investigate disputed charges, and refrain from taking adverse action against the borrower’s credit standing while the investigation is pending.5Federal Trade Commission. Fair Credit Billing Act Consumer borrowers also have the right to periodic statements and to have overpayments refunded or credited.
State usury laws set the maximum interest rate a lender can charge, with limits that vary widely by jurisdiction and often carve out exceptions for commercial transactions. The federal government does not set a general maximum, but the Military Lending Act caps rates at 36% for active-duty service members and their dependents.