Each company has its own financial resources. Revenues from sales, financial contributions from owners, interest on deposits are the basic own sources of funds for the company. However, there are a frequent situations when own funds of company are not enough for its operations. Receiving of credit funds is necessary in this case. Today we will talk about the features of bank credits on operational goals of the company.
Let’s start with definitions.
Definition of bank credit.
A bank credit is money provided by the bank to the borrower for a specified period and for specific purposes. The borrower pays the bank interest and other charges on credit.
A short-term (operating) bank credit is a bank credit, which is provided to the borrower for the current business operations. Term of operational credit can not exceed one year.
Short-term credit can be used for the purchase of raw materials, spare parts, for payment of services or for other transactions.
Borrower applies to the bank with the appropriate application for such credit.
Procedures for obtaining credit may be slightly different in different banks, but such procedures have much in common.
The borrower should submit to the bank package of documents, in addition to application.
The indicative list of documents for obtaining of operating credit includes the following documents:
- Statute of company;
- Registration certificate and licenses;
- Balance sheet at the last reporting date and for the last 3 years;
- Financial statement for the last reporting period and for the last 3 years;
- Information from other banks about open accounts and cash flow on these accounts over the last year;
- Information from other banks about the presence of other credits;
- Legal documents for property, which will be pledged.
This list is illustrative, because banks can require additional documents.
The bank considers and analyzes the received documents. After that bank concludes credit agreement with the client, if decides to provide a credit.
Operating credit can be given in several forms. The most common bank credit types (forms) are the following:
- Disposable credit. A bank transfers the full amount of the credit to the borrower’s account or pays borrower’s accounts receivable under such credit.
- Non revolving line of credit. A bank sets limit of credit line and the borrower can use the credit not immediately, but in parts within the limit. The borrower can not get credit again after its maturity.
- Revolving credit line. A revolving credit line has the same conditions as not revolving credit line, but the borrower after credit repayment can get it back within the defined limit.
- Overdraft. An overdraft is a special form of credit. Bank pays the borrower’s payments from his account even if the account has no funds. Negative balance on account is formed as a result of overdraft. Overdraft also has its limit.
The main tasks of the financial manager in credits management are the following:
- To analyze the expediency of obtaining credit;
- To determine the required credit amount;
- To define the credit terms and sources of revenue for its repayment;
- To determine the most effective and economical credit schemes;
- To calculate interest amount to be paid on credit. Please note that the borrower can pay additional payments to the bank in the form of single or regular commissions in addition to the interest on the credit.
- To include financial expenses on credit into the price calculations.
- To control the timeliness of credit and interest repayments. Bank can charge penalties for untimely repayments.
Operating short-term credits should be involved, if the company has short-term funds deficits. It is expedient to attract long-term credits or financial investments in cases when company has a long-term deficit of funds or plans to implement the investment project.