A contract loan is Types of bank loans. Current loan: pros and cons

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Contracting loan is a classic type of bank lending. This term means lending provided by a bank or a credit institution, which can be applied by the client to the extent necessary for him, not exceeding the amount established by the agreement.

The main purpose of the loan is to provide the borrower with the opportunity to make payments in the absence of funds in the current or current account. At the expense of the issued loan, the current assets of the client in the credit institution are created.

Features of a contract loan

A checking loan is provided by a credit institution simultaneously with opening a checking account. The account displays cash receipts, all payments and loans. Payment documents of the client are paid from the funds available on this account. The basis for opening a checking account is an agreement drawn up with the client. The documents indicate the maximum amountdebts, terms of the loan, deadline for having a debit balance on the account, interest rate, commission from the amount of turnover on credit and debit in percent. The amount of interest depends on the amount of credit used. Their calculation is carried out on the basis of the Central Bank rate, taking into account the bank surcharge. Interest on a contract loan is the highest and accrues upon opening an account.

Reliable and stable customers of a certain bank, working with it for a long time, a contract loan is issued in the form of bank loans of an unsecured type. But the bank at the same time has the right to demand from the client the fulfillment of certain conditions that act as loan security.

Collateral for small businesses receiving a contract loan is securities, mortgages, collateral, third-party guarantees, and client waivers of long-term claims due to financial insolvency. To control the provision of a credit return, the bank may resort to various methods, but the main method is to compare the actual and planned balances of working capital. Another way is a quarterly comparison of the planned amount of the loan and the debt on the account.

Contracting credit is usually provided to reliable clients who have been cooperating with a banking organization for a long time and have a valid account. Operations should be carried out on it - for example, payment of accounts payable or receivable. A current account is attached to the account.credit.

Loan conditions

Lending companies must meet two basic requirements:

• The company's equity capital must fully or 80% cover the need for financing.
• A loan can be issued without collateral, provided that the company complies with I class creditworthiness.

When the bank requires collateral

A credit institution may require collateral in certain cases:

• The bank doubts the creditworthiness of the borrower.
• The level of creditworthiness is below I class.
• Tense economic situation in the economic sphere, industry or country.
• Low availability of credit resources due to instability in the credit market.

Credit Rating

When applying for any type of bank loans, banks devote a lot of time to assessing the creditworthiness of the client. The assessment methodology may differ depending on the credit institution, but the main requirements are:

• High rates, allowing the borrower to be classified as a class I.
• Provisioning net income.
• Maintain market position for a long time.
• Good reputation and partnerships.

Contractual lending agreement includes the main provisions governing the relationship between a commercial bank and a client: solvency control methods, forms of securing the return of credit funds,mechanism for setting an interest rate, limiting or terminating lending in case of insufficient solvency and creditworthiness of the borrower, the procedure for providing borrowed funds, maintaining accounting accounts and a credit limit.

Differences in a contract loan

Contracting credit has features that distinguish it from other types of short-term credit.

• The borrower's creditworthiness is assessed once at the first loan disbursement. Further financing does not require the client to provide documents.
• The maximum amount of credit funds for a contractual loan is not determined by the bank. The amount of the loan depends on the credit institution's assessment of the borrower's solvency. The bank examines the working capital, balances of the client's finances and sources of financing. Funding limit may correspond to the average value of previously issued loans.
• The lack of control over the client's solvency and the need to have reserves to provide a loan to the client increase the risks of lending for the bank.
• The loan must be repaid within the terms established by the agreement, otherwise the bank has the right to set an interest rate scale in order to stimulate the borrower to repay the loan.
• The loan being issued is not secured. This practice is most often found in the West when issuing short-term loans and loans. Russian credit institutions use the borrower's property, third-party guarantees, and securities as collateral for a loan due to high risks.
• Debt repayment occurs automatically from the funds on the client's current account.

Differences between a contract loan and an overdraft

Overdraft has features that distinguish it from current accounts:

• Both commercial banks and the Central Bank of the Russian Federation can act as a creditor.
• On the borrower's accounts - settlement or correspondent - all overdraft operations are reflected.
• The loan is provided by debiting funds from the top of the account balance;
• The agreement for settlement and cash services stipulates the possibility of carrying out overdraft lending operations, which eliminates the need for an additional agreement.
• Loan limit is negotiated only if high-risk loans are issued.
• The maximum overdraft period is 10-15 days. If the borrower violates this condition, the overdraft loan becomes a regular loan and requires a standard loan agreement.
• Compared to other short-term loans and borrowings, overdraft has a high interest rate. Loan payments represent a certain portion of the debt, summed up with the interest rate.
• On the accounts of commercial banks, overdraft transactions are reflected with certain features.

Contracting credit in practice

A striking example of a contract loan isthe work of an individual entrepreneur who pays for the goods he imports from his bank account. The income of the entrepreneur expressed in monetary terms is credited to the same account. If it is necessary to provide an urgent prepayment and there is no financial means for this, the entrepreneur can apply for a current loan. This will allow you to make an advance payment and pay off the debt immediately after the appearance of funds in the account. This type of loan is short-term and unsecured.

Bank risks

Kontokorrent - a type of short-term loan that carries certain risks for a banking institution. For this reason, it is provided only to reliable and reputable clients who are able to repay the loan received.

When applying for a contract loan, the bank performs the following steps:

• Evaluates the business reputation of the client.
• Tracks his debt to partners.
• Conducts analysis and assessment of the borrower's credit history in all institutions with which he has ever worked.
• Views the amount of working capital and balance of the enterprise.

Based on this information, the bank determines the level of solvency and creditworthiness of the client.

Contracting loan development outlook

Overdraft and a current loan are similar in many ways: credit cards are beneficial for the borrower, but only in the short term. Late repayment of a loan canlead to the fact that the balance of the debt will begin to be subject to high interest. Rates differ for contract loans, overdrafts and consumer loans, with rates higher for contract loans because they do not involve collateral or collateral.

In the US and Europe, a contract loan is one of the most common types of loans. Many companies use debit bank accounts as loan accounts without making additional agreements. Firms know in which bank they can take a loan, because they are its regular customers. A contract loan allows you to quickly pay off customers or suppliers.

Russian banks, in which you can take a loan, issue counter current only after the assessment and verification of the borrower. However, the prospects for the development of this type of loan in the Russian Federation are possible only thanks to the main banks striving to reach the world level.

Pros and cons of a contract loan

Contract lending is beneficial for both parties: the borrower can use credit funds in the absence of his own, and the bank saves credit resources. This type of lending is considered the most risky, which explains its disadvantage - a high interest rate for using such a loan.

Results

Corporate lending is one of the most risky forms of lending. This explains the high fee for using the loan compared to other short-term loans.

Incompletethe use of a credit line is a violation of the credit agreement. A credit line of a contractual loan, in simple terms, is a lending that combines the features of a loan and current accounts and is characterized by the continuous issuance of loans to the client. The bank has the right to collect a commission from the client as compensation for lost profits.

The issuance of contract loans by Russian banks is temporarily suspended, since all the proceeds of organizations must be kept on their current account in accordance with current regulations.