Overdraft lending is a profitable financial instrument for both the borrower and the banking organization. It allows you to get the missing funds at the right time, while giving a steady, albeit not too significant, income to the creditor.
What is overdraft lending
Loans of this type are inherently quite ordinary loans, which are provided to the company on the basis of any agreements and on predetermined conditions. This product differs from standard loan forms in that it simply leaves the customer with the opportunity to borrow 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 this moment, the company is obliged to return all the money with interest within the agreed time. But the analysis of overdraft lending suggests that it is given only when it is needed. In fact, this 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 obtained. There are a lot of options and varieties of such loans.
Varieties
Overdraft credit 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 its financial statements and almost all other indicators. The main thing here is turnover and revenues. If a banking organization sees that large amounts of funds are being transferred to the accounts of this person with enviable regularity, it can offer exactly 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 companies that regularly submit revenue 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 have been handed over, all debt is repaid. It should be noted that the arrangements here can be very diverse.
The third type of loan 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 to service.
The last, fourth, is the standard type. It is most suitable for 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 of his own free will. The financial institution, in turn, stipulates how long it will be able to use the money and on what terms.
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 does not receive virtually any collateral, and in case of problems or non-payment, it becomes extremely difficult to return the money. The bottom line is that the amounts offered to individuals are not too large, and because of them, no one will sue, because there will be more problems than benefits.
For companies
Overdraft lending to legal entities is already a more serious financial instrument. Here, the amount is much larger, and such loans are returned 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 sent into circulation, this is quite enough.
Features
There are several main features that any overdraft loan has. The first is the lack of a loan purpose. That is, most often any loan is intended for specific, predetermined purposes. But the funds obtained by overdraft, as a rule, can be sent in any convenient direction. The second feature is the loan term. Most often, it is less than one month. In some cases, two or more, but this is rare. This refers not to the period during which the client, in principle, has the opportunity to take money, but rather, after what time he must return it in full. The interest rate on such loans is usually higher than on a regular 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 standard contract for standard lending. The main differences are conditions that are characteristic only for such a system as overdraft lending, as well as a tight binding to the current account (for legal entities). Many banks stipulate the possibility of forcibly debiting 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, it will contain clauses on force majeure circumstances and conditions for non-return of funds. Sometimes there is also other information that may be required in accordance with applicable law, bank regulations, customer wishes and so on.
Example for a legal entity
The company constantly receives at its account certain approximately equal and stable amounts of funds. Based on their analysis, the bank offers the company to open an overdraft. After agreeing and concluding a contract, the company gets the opportunity to use not only the money that it has in its account, but also the money that the bank gave it. Suppose that the company has the opportunity to conclude a very profitable deal, but it lacks its own funds for its implementation (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, after which she can 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 immediately sends by agreement to pay off the debt. This was the simplest and most obvious 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 both use and not use. There is a fixed amount. A client comes to the store and sees a product that he had wanted to buy for a long time, but there was no money or other opportunities. And now the desired is sold at a good discount. If the borrower did not have an overdraft card, he would be forced to save money further and ultimately purchase the goods after the end of the promotion in the store, at a much higher price. And with 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 issue for all overdrafts. True, most often it relates to individuals who cannot or do not want to return previously received funds. If the amount for the bank is insignificant, then a person can just get lucky, and if they do not forget about it, then at least the solution to the problem will be postponed for a long time (during which very considerable interest will be "dripped"). But, of course, sooner or later it will still have to be returned. As soon as the bank understands that the amount is already large enough to contact the court and collectors, it will begin the proceedings and will certainly achieve its goal.
Benefits
Overdraft lending has a number of advantages. This includes such features as a small package of documents, the absence of the need to provide a pledge, the absence of a fee for the money that was not used by the client, and the instantaneous provision. That is, a person or a legal entity may be interested in one or another element (or all at once) and that is why it will take a loan. For the bank, all this is not particularly convenient and profitable, however, such a system makes it possible to retain customers, attract new ones and even make small profits. Most often, financial organizations earn more not on the loans themselves, but on various services related to them. For example, the borrower may like to work with this bank, and he will decide to place a deposit there, take a larger loan, receive wages, a pension or other means of funds through it. As a result, the total profitability of one loan grows significantly, and many banks take this feature into account, which allows offering potential borrowers an overdraft at interest that is less than market. 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.
disadvantages
Of course, an overdraft card or similar loan has some disadvantages. The main one is an 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, overdraft, most often you need to return 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 is annoying for many and may ultimately lead to significant losses. Among other things, some scammers use fake documents to get loans of this type due to the fact that special papers are not 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 that is on the contract, and the financial institution is beginning to suffer losses. Least of all problems with legal entities, because you can always write off the amount of debt from the current account of the company. However, if there is no money on the balance sheet and is not expected, then again a problem arises with the return of unsecured funds. It should be noted that many banks have special services that track changes in the amount of proceeds to the account of borrowers and raise an alarm if the situation begins to worsen. In this case, the financial institution may simply close the overdraft, completely depriving the company of access to borrowed funds.
Summary
Despite the presence of shortcomings, in general, this system is very profitable and convenient, especially to customers. It allows you to receive as much money as needed in a timely manner, which, in turn, allows individuals to purchase the goods that are needed, and legal entities to invest additional funds in their activities, receiving much more than they will have to return, even taking into account accrued interest . The main thing in all this is the timely repayment. Even a small delay can globally ruin the credit history, which will not make it possible to get loans from other banks, and penalties, commissions, interest and other payments, which in the end will have to be returned all the same, can significantly exceed all reasonable limits and even the original loan amount.