The content of the article
- What is a credit line with a disbursement limit
- For legal entities
- For individuals
- What is the difference between a loan and a credit line
- Types of credit lines
- Revolving credit limit
- Credit line
- Specific species
- Granting a credit line by Russian banks
- Loan currency
- Credit line debt limit
- Loan terms
- Fixed or floating interest rate
- Commission percentage
- How to open a credit line
- Legal entity
- Bank credit account for an individual
- Revolving Credit Card
- Advantages and disadvantages
Credit is not the only banking product with which you can borrow money from a financial institution. A credit line is a type of loan, which implies that the issuance of funds in debt is not carried out at one time, but in parts, the debt can be renewable or with a limit on issuance. This is a convenient lending option that is beneficial to the borrower and lender. This product is offered by many financial organizations, but the largest volume of lending falls on Sberbank and VTB24 – they serve the lion’s Russian population.
What is a credit line with a disbursement limit
The line of credit is similar to ordinary consumer credit, because the amount of borrowed funds is initially prescribed in the contract and does not change throughout the entire period of cooperation with the bank. The bank gives out money gradually, the frequency and amount of each cash tranche are agreed in advance. When the payment cannot be received, the bank reserves the balance of outstanding funds (as a rule, a commission is taken for this operation).
A credit line with a limit of issuance is very popular – to pay for education, refinancing a mortgage, buying a car. Legal entities often use this type of loan when paying for large long-term deliveries and financial transactions. The loan is repaid according to the individual repayment schedule (one-time at the end of the term or with the frequency specified in the agreement). Interest is paid monthly or quarterly.
For legal entities
Financial institutions often offer businesses to take a limited line of credit. Interest is fixed or set for each transaction separately. Financial institutions charge about 2% for opening a loan to legal entities and may require the borrower to provide liquid security in the form of movable and immovable property, tangible and intangible assets of the enterprise.
Benefits for legal entities:
- interest on the loan is accrued only on the used funds;
- flexible conditions for the provision of funds (tranche size and schedule of payments);
- the ability to set up automatic repayment of the principal amount upon receipt of money in the current account;
- interest is accrued only on spent tranches.
A non-revolving credit line is open to individuals and can be provided for any needs, this loan is inappropriate. It is taken to pay off debts for training, buying a car and even an apartment. The latter option is much more profitable than a mortgage – interest for using bank money is calculated only from the amount of the loan actually used. There are also disadvantages – as soon as the creditor has doubts about your creditworthiness, he can block the issuance of tranches, financial discipline is necessary here as air.
What is the difference between a loan and a credit line
The main difference from conventional one-time lending is that a financial institution does not provide a loan immediately with the full amount, but gradually in the form of regular tranches. The conditions may differ – with a limit on disbursement, when the loan amount is specified in the contract in advance and does not change, and a debt limit when credit funds can be used again after the payment of the main part of the debt. Another difference from a regular loan is the savings on interest, because they accrue on issued cash.
Types of credit lines
Banks offer two main varieties that are suitable for both organizations and individuals:
- non-renewable – the amount of the cash loan is paid in installments, and the frequency and maximum amount of the tranche can be fixed or individual, at the request of the borrower, similar to a classic loan.
- renewable – money is paid in installments on demand, and repayment is arbitrary, and as the loan is paid, you can use the bank’s money again.
The client enters into an agreement with the bank to pay him a certain amount of debt, but not at a time, but in installments. The contract can specify whether regular payments are provided (for example, to receive a tranche every three months) or whether the borrower will independently determine when and what amounts he will need. This type of loan is beneficial for entrepreneurs – to replenish working capital, settle accounts with suppliers or gradually develop a business or individuals who borrow from a bank for a specific purpose.
In fact, this is a multiple loan, the contract for which is executed only once. Funds are simply transferred to the client’s bank account automatically within the established date, or are issued to the borrower at the bank upon his request. The term of repayment is clearly stated in the contract – either in a specific period or arbitrarily, but within a certain term of the contract. By the end of the contract, the debt should be closed and the obligations of the bank and the client cease to be valid..
Revolving credit limit
In this case, the borrower receives funds from time to time, but within the limit established by the financial institution. The debt is repaid arbitrarily, and after a partial payment of the debt, you can again use the money of the bank. The most common example of a revolving loan agreement is a credit card. As money is withdrawn from it, the debt to the bank increases, but after the partial repayment of the debt, the client can again use the borrowed funds. Interest in this case is paid only from real debt to the bank.
This type of lending is often used by large enterprises that apply for the issuance of a number of loans for specific transactions. This is a targeted loan, the bank may require the submission of documents confirming that the client will use the loan as intended. A financial institution enters into a basic agreement to open a line of credit and several agreements for each new tranche issued to a client. A convenient way of lending to seasonal enterprises, in addition, you do not need to submit documents to the bank each time, which significantly saves time.
The main condition for opening a revolving loan is a certain limitation of the issued funds. Unlike non-renewable, it allows the borrower to repay the debt in an arbitrary manner and borrow money from the bank again, but within the agreed limit specified in the agreement. This process can be repeated several times during the term of the contract with the bank. The most common example is a credit card with an available limit of funds for issuing.
There are other types of schemes:
- on-call credit scheme – involves the issuance of a loan several times if the debt is repaid ahead of schedule;
- contractual credit scheme – the client opens an active-passive account with the possibility of crediting payments and paying off debts automatically upon receipt of money;
- multicurrency – the contract indicates the amount of the loan in one currency, and tranches can be provided in another;
- on demand – issuance is carried out in tranches daily or on request.
Granting a credit line by Russian banks
Terms of lending to a legal entity are as follows:
- the amount of credit resources directly depends on the turnover of funds in the client’s account;
- issued in rubles or freely convertible currency;
- when issuing borrowed funds, the credit history of the borrower is taken into account;
- the interest rate can be fixed or floating, taken separately for each tranche;
- interest rates range from 10 to 20%;
- at the opening, a commission of 2% of the amount is taken, sometimes a monthly fee is charged for maintaining an account with a renewable scheme.
Money is issued to the borrower in rubles or freely convertible currency of other countries (euro or dollar). With a multi-currency lending scheme, the option is possible when the contract is drawn up for a loan in rubles, and tranches in currency are listed. This helps to save on the cost of conversion fees, which is very beneficial for large loans, also when compiling a loan portfolio. These types of loans are available to individuals..
Credit line debt limit
The amount of total debt is determined according to the balance sheet and solvency of the borrower – the volume of its working capital and assets owned by his company. Calculation formula: С = (ЗП + ПН + ПГ + ЗД + ОТ) – (ЗК + СС), where:
- C – the amount of cash funds of the loan;
- ЗП – stocks of production;
- PN – work in progress;
- PG – finished products;
- ЗД – accounts receivable;
- FROM – shipped goods;
- ЗК – accounts payable;
- SS – own funds;
Typically, a bank opens a line of credit to an enterprise or individual for a period of three to five years. Sometimes a contract is concluded for a minimum period of one year, but in this case, the financial institution needs to make sure the client’s ability to return the money, assess the status of his assets and require liquid security – any company property or physical person, transport, housing, assets, equipment, for which supplementary agreement.
Fixed or floating interest rate
The peculiarity of this type of loan is manifested in different methods of calculating interest – that is, fees for using money:
- a fixed rate is set for the entire period of the contract and cannot be changed;
- the floating rate is set by the bank and depends on several indicators, including the Central Bank refinancing rate, Libor, Mosprime rates, and fluctuations in the country’s economy;
- sometimes interest is calculated separately for each tranche, which is typical for large and multicurrency loans.
An additional commission in the amount of two percent of the loan amount is taken from the client for the service of issuing a current account under the loan line agreement. With a non-renewable scheme, a reservation fee may be charged (when the client cannot receive the tranche). In case of technical overdraft (exceeding the permissible amount of lending), additional penal interest is calculated. With a revolving loan, a fee for servicing an account may be charged..
How to open a credit line
A credit line is opened at the bank where a private person or company is serviced. An approximate algorithm of actions is as follows:
- To study the main advantages and the procedure for granting a loan in your bank, to study additional costs
- Submit relevant documents confirming solvency (balance sheet, constituent documents, applicant’s passport).
- For the target (framework) loan, submit documents on the project with its independent evaluation;
- Fill out an application with information about yourself and the company.
- Wait for a decision.
As a rule, a credit line opens in the same place where the company is serviced. When you open a current account in a financial organization, copies of the main documents (charter, information about the founders and the balance sheet) are provided. To consider the issue of a loan to a medium and small business, a specialist may require additional documents: balance sheet of the company for the last six months, a lease agreement for the premises or property on the property, a bank statement, information on possible assets for collateral.
Bank credit account for an individual
A bank may open a line of credit to an individual, provided that it has its own settlement or payroll account, through which operations, open deposits or previously taken loans are constantly performed. Loans are issued with a positive overdraft (credit history). The maximum size is calculated based on the level of earnings or turnover on the account. The contract is concluded for a year, in the future it is renewed automatically.
Revolving Credit Card
A credit card is nothing more than a revolving credit line with a debt limit. The basic principle of a credit card is the reuse of bank funds. The maximum limit of borrowed funds is determined by the bank on the basis of the documents on the amount of earnings and work experience in one place. The rate can reach 50% per annum, but on average ranges from 20 to 38%. At the end of the contract, the card is reissued, and it can be used again. To open a renewable line of credit, a passport of a citizen of the Russian Federation with permanent registration is required.
Advantages and disadvantages
This form of lending can be called a progressive method of cooperation with financial organizations and highlight several advantages:
- planning for receiving trenches yourself;
- the ability to choose the most suitable option from several varieties;
- time saving – there is no need to conclude an agreement each time upon receipt of the next tranche;
- lack of interest payments until the client receives the first tranche;
- lower interest compared to classic loans;
- option of automatic debt repayment from the borrower’s current account.
There are also disadvantages:
- long approval of the application – the bank carefully examines the financial condition of the borrower, a high risk of failure;
- a financial institution may unilaterally stop paying tranches if the client violates the terms of the contract;
- the bank must be informed in case of sharp changes in the enterprise (opening a new type of activity, for example);
- some financial institutions penalize borrowers if they do not use borrowed funds or charge for preserving unused tranches.