Line of credit: Difference between revisions
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The bank or financial institution will normally charge a fee for setting up a line of credit. The fee would typically cover the cost of processing the application, performing security checks, legal fees, arranging collateral, registrations, besides other things. |
The bank or financial institution will normally charge a fee for setting up a line of credit. The fee would typically cover the cost of processing the application, performing security checks, legal fees, arranging collateral, registrations, besides other things. |
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Normally, no interest is payable under the line of credit until the customer actually draws on a part or all of the credit facility. There may also be a fee for keeping the credit facility open, which may be a monthly, quarterly or annual fee. |
Normally, no interest is payable under the line of credit until the customer actually draws on a part or all of the credit facility. There may also be a fee for keeping the credit facility open, which may be a monthly, quarterly or annual fee. For example, credit card companies typically charge an annual account fee; they also typically apply complex interest charging rules, such as no interest being payable if the account is paid in full by the monthly due date, minimum monthly repayment amounts, etc. |
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== References == |
== References == |
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Revision as of 19:17, 14 August 2019
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A line of credit or credit facility is credit source extended to a government, business or individual by a bank or other financial institution. A line of credit takes several forms, such as overdraft protection, demand loan, special purpose, export packing credit, term loan, discounting, purchase of commercial bills, traditional revolving credit card account, etc. It is effectively a source of funds that can readily be tapped at the borrower's discretion. Interest is paid only on money actually withdrawn. (However, the borrower may be required to pay an unused line fee, often an annualized percentage fee on the money not withdrawn.) Lines of credit can be secured by collateral, or may be unsecured.
Lines of credit are often extended by banks, financial institutions and other licensed consumer lenders to creditworthy customers (though certain special-purpose lines of credit may not have creditworthiness requirements) to address liquidity problems; such a line of credit is often called a personal line of credit. The term is also used to mean the credit limit of a customer, that is, the maximum amount of credit a customer is allowed.
Cash credit
A cash credit is a short-term cash loan to a customer. A bank provides this type of funding, but only after the required security is given to secure the loan. In cash credit, the bank advances a cash loan up to a specified limit to the customer against a bond or other security. Once a security for repayment has been given, the business that receives the loan can continuously draw from the bank up to a certain specified amount.
India
In India, banks offer cash credit accounts to businesses to finance their "working capital" requirements (requirements to buy raw materials or "current assets", as opposed to machinery or buildings, which would be called "fixed assets"). The cash credit account is similar to current accounts as it is a running account (i.e., payable on demand) with cheque book facility. But unlike ordinary current accounts, which are supposed to be overdrawn only occasionally, the cash credit account is supposed to be overdrawn almost continuously. The extent of overdrawing is limited to the cash credit limit that the bank sanctioned. This sanction is based on an assessment of the maximum working capital requirement of the organization minus the margin. The organization finances the margin amount from its own funds.
Generally, a cash credit account is secured by a charge on the current assets (inventory) of the organization. The kind of charge created can be either pledge or hypothecation.[1]
Business line of credits
A business line of credit is quite similar to personal lines of credit. The financial institution grants access to a specific amount of financing. A business line of credit can be unsecured or secured (typically, by inventory, receivables or other collateral) Lines of credit are often referred to as revolving and can be tapped into repeatedly. For instance, if there is access to a $60,000 line of credit and $30,000 is taken out, access to the remaining $30,000, if necessary, remains. If all $30,000 is paid back, there is access to the entire $60,000 without having to reapply, one of the biggest benefits of a line of credit.
Costs and interest
The bank or financial institution will normally charge a fee for setting up a line of credit. The fee would typically cover the cost of processing the application, performing security checks, legal fees, arranging collateral, registrations, besides other things.
Normally, no interest is payable under the line of credit until the customer actually draws on a part or all of the credit facility. There may also be a fee for keeping the credit facility open, which may be a monthly, quarterly or annual fee. For example, credit card companies typically charge an annual account fee; they also typically apply complex interest charging rules, such as no interest being payable if the account is paid in full by the monthly due date, minimum monthly repayment amounts, etc.