Overdraft lending to legal entities and individuals

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

Overdraft lending is a profitable financial instrument for both the borrower and the banking organization. It allows you to receive the missing funds at the right time, while giving a constant, albeit not too significant, income to the creditor.

What is overdraft lending

Loans of this type are, in their essence, a completely ordinary loan, which is provided to an enterprise on the basis of any agreements and on predetermined conditions. This product differs from standard forms of loans in that it simply leaves the client the opportunity to take money. That is, according to the standard scheme, funds are transferred to the account of the borrower or a third party in agreement with the company. They are listed immediately and in full. From that moment on, the company is obliged to return all the money with interest within the agreed period. But the analysis of overdraft lending suggests that it is given only when it is needed. In fact, it is more profitable for the company, because you need to pay interest only on the amount taken, and not on the amount that can be received. There are a lot of options and varieties of such loans.

Varieties

Overdraft loan is divided into four main types:

• technical,
• for collection,
• advance,
• standard.

The first type is a loan that is offered to the client without taking into account his financial statements and almost all other indicators. The main thing here is turnover and income. If a banking organization sees that large amounts of funds are received into the accounts of this person with enviable regularity, it can offer precisely the technical version of an overdraft. It is risky, but beneficial to both parties.

The second type, which can accept overdraft lending, is suitable for large retail chains or other firms that regularly donate proceeds to the bank. This is a more reliable option, in which the company can use the money even before they actually fall into the account, and after the proceeds are handed over, all debt is repaid. It should be noted that the agreements here can be very diverse.

The third type of loans is advance. It is the least profitable for the bank, but it is convenient for the company. This option of providing loans is most often practiced in order to attract a legal entity for servicing.

The last, fourth, standard type. It most of all fits the classic description of overdraft lending for legal entities. Its essence is simple. The client agrees with the bank that he will be able to use certain amounts at his own request. Financi althe organization, in turn, stipulates how long he can use the money and under what conditions.

For individuals

Overdraft lending to individuals is most often carried out by issuing a plastic credit card, on which a fixed amount is reserved for the client, which he can use at his own discretion. This type of loan is familiar to many people, it is understandable and accessible. The main problem here is that the bank receives virtually no collateral, and in case of problems or non-payment, it becomes extremely difficult to return the money. The bottom line here is that the amounts offered to individuals are not too large, and no one will sue because of them, as there will be more problems than good.

For companies

Overdraft lending to legal entities is already a more serious financial instrument. Here the amounts are much larger, and such loans are returned much more often. Many enterprises prefer this form of loans to everyone else, as it is profitable, simple and convenient. True, in most cases the amounts are not too large, but as additional funds that can be put into circulation, this is quite enough.

Features

There are several main features that any overdraft loan has. The first is the lack of purpose of the loan. That is, most often any loan is intended for specific, predetermined purposes. And here are the funds received with the help ofoverdraft, as a rule, can be directed in any convenient direction. The second feature is the term of the loan. Most often it is less than one month. In some cases, two or more, but this is rare. This does not mean the period during which the client, in principle, has the opportunity to take money, but after what time he must return them in full. The interest rate on such loans is usually higher than on a conventional loan, but the number of required documents is much less. And one more important point: most often no security is required.

Overdraft loan agreement

This document is not much different from a regular standard loan agreement. The main differences are the conditions that are typical only for such a system as overdraft lending, as well as a rigid link to the current account (for legal entities). Many banks stipulate the possibility of forced debiting of money from the account of a potential borrower if he himself does not repay his debt on time for one reason or another. The contract is drawn up on a standard form, includes the details of both parties, clearly stipulates the financial part of the issue (how much, where, to whom, when, and so on), and also, most likely, will contain clauses on force majeure and conditions for non-return of funds. Sometimes there is also other information that may be required in accordance with applicable law, bank regulations, the wishes of the client, and so on.

Example for legal entity

The company constantly receives certain approximately equal and stable amounts of funds into its account. Based on their analysis, the bank offers the company to open an overdraft facility. After agreeing and concluding an agreement, the company gets the opportunity to use not only the money that it has in its account, but also those that the bank gave it. Suppose that a company has an opportunity to conclude a very profitable deal, but it does not have enough own funds to carry it out (it urgently needs to expand, purchase materials, and so on). And at this moment, she can take the reserved money and fulfill all the conditions, and then receive additional profit. At the moment when the loan needs to be repaid, the company receives already increased income on its account, which the bank, by agreement, immediately sends to pay off the debt. This was the simplest and clearest example of overdraft lending.

Example for an individual

In the case of ordinary people, everything looks even simpler. A person receives a card from the bank, which he can either use or not use. There is a fixed amount. The client comes to the store and sees a product that he wanted to buy for a long time, but there was no money or other opportunities. And now what you want is sold at a good discount. If the borrower did not have an overdraft card, then he would be forced to save money further and eventually purchase the goods after the end of the promotion in the store, at a much higher price. And with the help of this card, he pays for the purchase immediately and,most likely saves a lot, especially if he can pay off his debt in a short period of time.

Delay

This is a global problem for all overdrafts. True, most often it concerns individuals who cannot or do not want to return previously received funds. If the amount for the bank is insignificant, then a person may simply be lucky, and if they don’t forget about him, then at least the solution to the problem will be postponed for a long time (during which very rather big interest will “drip”). But, of course, sooner or later it will still have to be returned. As soon as the bank realizes that the amount is already large enough to contact the court and collectors, it will begin proceedings and will definitely get its way.

Benefits

Overdraft lending has a number of advantages. This includes such features as a small package of documents, no need to provide a deposit, no payment for the money that was not used by the client, and instantaneous provision. That is, a person or legal entity may be interested in one or another element (or in all at once) and that is why they will take a loan. For the bank, all this is not particularly convenient and profitable, but such a system makes it possible to retain customers, attract new ones, and even make a small profit. Most often, financial institutions earn more not on the loans themselves, but on the various services associated with them. For example, a borrower may enjoy working with a given bank, andhe decides to place a deposit there, take a larger loan, receive wages, pensions or other options for funds through it. As a result, the total yield from one loan grows many times, and in many banks this feature is taken into account, which makes it possible to offer potential borrowers an overdraft at an interest rate that is less than market rates. Naturally, this is already convenient for customers who have the opportunity not only to receive "cheap" money, but also to be served in a suitable bank.

Flaws

Of course, an overdraft card or similar loan has some disadvantages. The main one is the extremely short period during which you can use the money. Unlike the standard form of lending, which provides for a year or even several years, an overdraft, most often needs to be repaid within a month or several months, which is not very convenient. Do not forget about the obsession of the service. Some banks open such loans even without the knowledge of the client, which annoys a lot of people and can ultimately lead to significant losses. Among other things, some scammers use fake documents to obtain loans of this type due to the fact that no special paperwork is required from the client. As a result, they are not going to return anything, the real owner of the documents has nothing to do with it, because it is not his signature on the contract, and the financial institution begins to suffer losses. Least of all problems with legal entities, because you can always write off the amountdebt from the current account of the company. However, if there is no money on the balance sheet and is not expected, then again there is a problem with the return of unsecured funds. It should be noted that many banks have special services that monitor changes in the amount of receipts on the borrowers' account and raise an alarm if the situation starts to worsen. In this case, the financial institution can simply close the overdraft, completely depriving the company of access to borrowed funds.

Results

Despite the presence of shortcomings, in general, this system is very beneficial and convenient, especially for customers. It allows you to receive as much money as you need in a timely manner, which, in turn, enables individuals to purchase goods that they need, and legal entities to invest additional funds in their activities, receiving much more than they will have to return later, even taking into account the accrued interest.. The main thing in all this is the timeliness of repayment. Even a small delay can globally spoil the credit history, which will not make it possible to receive loans from other banks, and pen alties, commissions, interest and other payments, which in the end will still have to be returned, can many times exceed all reasonable limits and even the original loan amount.