Credit line: the main advantages of this form of borrowing

Credit line: the main advantages of this form of borrowing
Credit line: the main advantages of this form of borrowing

Video: Credit line: the main advantages of this form of borrowing

Video: Credit line: the main advantages of this form of borrowing
Video: Energy Efficient and Sustainable Building Design Principles for East Africa 2024, November
Anonim

In the standard sense, the term "loan" is perceived as a one-time issuance of a certain amount of money to the borrower, followed by their return, taking into account the interest that acts as a payment for the use of the provided resources. However, recently in banking practice, such a form of borrowing as a credit line has become widespread. It involves the conclusion of an agreement between a credit institution and an enterprise, on the basis of which the client does not take the entire amount, but in separate parts or tranches.

credit line
credit line

Thus, the credit line gives the head of the company the opportunity to periodically make up for a temporary lack of finance for the implementation of the main activity. This eliminates the need to sign a new agreement for each loan each time. For commercial banks, this form of lending is also useful, because it allows you to expand your customer base, which significantly increases profits. Based on a bilateral agreement, the bank setscredit limit. This is the maximum amount of funds that can be issued to a particular borrower in the total amount. The size of the tranche is often limited as well.

It is worth noting that the credit line is available not only to commercial enterprises, but also to individuals. For example, almost any citizen can apply for a loan in this form for the repair of their own housing, especially if settlements with contractors are carried out in a non-cash form. Commercial banks daily open credit lines to individual citizens or legal entities in the form of processing and issuing plastic cards.

With a deeper analysis of this banking product, three main types can be distinguished:

  • credit limit is
    credit limit is

    non-renewable line;

  • renewable;
  • mixed.

The first type involves setting a strict limit on the funds that can be issued to the client. As a rule, the bank independently sets the limit value for each specific borrower, based on an assessment of the financial condition of the enterprise and the solvency of the client. If the client has used the amount available to him and needs additional assistance, then in order to receive another loan, he will have to submit an application and draw up a new agreement. Renewal of this line of credit is not allowed, even taking into account the full repayment of debt on all tranches.

In this regard, we can conclude that a revolving line of credit is more profitable for commercial organizations. ATIn this case, a limit on the total amount is determined, but any number of tranches within the total loan amount can be used. If the borrower needs additional lending, he is obliged to pay the previous amount of debt and interest on the use of funds. Only after that he can apply for the renewal of the line.

credit lines
credit lines

Mixed form means that both the total amount of the loan and the amount of each tranche are subject to limitation. At the same time, the client can use any number of tranches for a certain period of time, but only within the established values.

Recommended: