Credit organizations offer legal entities a whole line of business lending products. Each bank has its own programs with certain conditions and even bonuses. However, the types of loans in all banks remain the same.
Overdraft is one of the most popular types of lending. The essence of this type is the reservation of a certain amount by the bank that the client can spend on urgent needs: for example, on the purchase of raw materials or new goods. Usually, the overdraft amount is equal to the monthly turnover of the company. The company cannot exceed it. With the help of an overdraft, the company makes payments even in the absence of its own funds, while a negative balance is displayed on the current account. As soon as money belonging directly to the company itself is credited to the account, a certain amount of them will be withdrawn to cover the overdraft. For using such a loan, the bank will charge a commission and take a quite high interest. Maturity usually does not exceed 30 days. Overdraft is convenient to use if there is a need for emergency lending for a short period.
Working capital loan
This type of loan is designed to replenish the working capital necessary for everyday operations – especially when expanding a business, financing the production cycle, in the case of a seasonal increase in sales, etc. In most cases, this is a short-term loan for up to 12 months. There are several varieties of this loan:
- for emergency needs. This loan is issued to finance an emergency one-time increase in the company’s need for working capital caused by the receipt of a large order, the conclusion of a transaction favorable to the company, or other circumstances;
- most often such a loan is issued to open a new business.
One of the varieties of a loan to finance working capital also includes:
This is a kind of agreement between the borrowing company and the credit institution on the loan amount the company can use on certain conditions and for a certain period of time. At the same time, after the credit line of the organization is approved, there is no need to coordinate its expenses. You can apply for funds at any time. This type of lending is often used to cover receivables or seasonal influences.
This type of lending allows you to get quite large amounts, sometimes equal to the semi-annual turnover of the company, at a fairly low-interest rate. But obtaining a credit line is quite difficult; you need to provide the bank with appropriate guarantees. Most often, banks open credit lines to their regular and trusted customers with a current account and a large number of assets.
In this case, the bank gives out financial resources for development and capital investments in the business. To obtain an investment loan, it is necessary not only to prove your solvency but also to provide a detailed business plan proving that investments in a certain period of time will significantly increase the debtor’s income.
A legal entity may need this type of loan if it acquires commercial real estate, for example, to expand production or open an outlet. The funds are issued for the purchase of the non-residential real estate, which, after the acquisition, serves as a pledge. If the company stops paying the loan, the bank puts the property up for auction as payment for the debt.