In the standard understanding, the term “loan” is perceived as a one-time issue of a certain amount of money to the borrower with their subsequent repayment taking into account the interest that is a payment for the use of the provided resources. However, recently in banking practice, such a form of borrowing as a line of credit 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.
Thus, the credit line gives the head of the company the opportunity to periodically fill in the temporary lack of finance for the implementation of core activities. This eliminates the need to sign a new agreement each time to receive another loan. This form of lending is also useful for commercial banks, because it allows you to expand your
customer base, which significantly increases profits. Based on bilateral agreement, the bank sets a credit limit. This is the maximum amount of funds that can be issued to a specific borrower in the total amount. Often the size of the tranche is also subject to limitation.
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 made in non-cash form. Commercial banks daily open credit lines to individuals or legal entities in the form of processing and issuing plastic cards.
With a deeper analysis of this banking product, there are three main types:
- non-renewable line;
- renewable;
- mixed.
The first type involves the establishment of 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 used the amount available to him and needs additional help, then in order to receive the next loan he will have to submit an application and draw up a new agreement. The resumption of this line of credit is not allowed, even taking into account the full repayment of debt for all tranches.
In this regard, it can be concluded that a revolving credit line is more profitable for commercial organizations. In this case, the limit of the total amount is determined, but you can use any number of tranches within the total loan amount. If the borrower needs additional lending, he is obliged to pay the previous amount of debt and interest for the use of funds. Only after this can he claim to resume the line.
The mixed form means that 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.