Overdraft lending to legal entities and individuals

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 permanent, albeit not too significant, income to the lender.

What is overdraft lending?

Loans of this type are inherently quite a normal loan, which is granted to the enterprise on the basis of any agreements and on pre-determined terms. It differs from the standard forms of loans for this product in that it simply leaves an opportunity for the client to take money. That is, according to the standard scheme, funds are transferred to the account of the borrower or a third party in consultation with the company. They are listed immediately and in full. From that moment the enterprise is obliged to return all money with interest at the agreed time. But the analysis of overdraft lending says that it is given only when it is needed. In fact, it is more profitable for the enterprise, because you only have to pay interest on the amount you have taken, and not with the one that you can get. There are a lot of options and varieties of such loans.

Varieties

Overdraft credit is divided into four main types:

• technical,
• For encashment,
• advance,
• standard.

The first type is a loan, which is offered to the client without taking into account its financial statements and almost all other indicators. The main thing here is turnover and income. If a banking organization sees that large amounts of funds are received on the accounts of this person with an enviable regularity, it can offer a technical overdraft option. It is risky, but it benefits both sides.

The second type, which can accept overdraft loans, is suitable for large trading networks or other firms that regularly deposit revenues to the bank. This is a more reliable option, in which the company can use the money even before they actually fall on the account, and after the proceeds are dealt, all the debts are repaid. It should be noted that the arrangements here can be very diverse.

The third type of loans is advance. It is the least profitable for the bank, but it is convenient for the company. This type of loans is most often used to attract a legal entity for services.

The last, the fourth, is the standard type. It best suits the classical 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 at his own will. The financial organization, in turn, stipulates how long it will be able to use money and on what terms.

For individuals

Overdraft lending to individuals is most often done by issuing a plastic credit card, at which a fixed amount is reserved for the client, to which he can be used at his own discretion. This type of credit 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 is extremely difficult to return the money. The point here is that the amounts of individuals are not offered too much, and because of them no one will sue because there will be more problems than good.

For companies

Overdraft lending to legal entities is already a more serious financial instrument. Here, too, the amounts are much larger, and such loans are returned much 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 means that can be channeled into circulation, this is quite enough.

Features

There are several key features that any overdraft loan possesses. The first is the absence of a loan objective. That is, most often, any loan is intended for specific, pre-specified purposes. But the funds received by means of an overdraft, as a rule, can be directed to any convenient side. The second feature is the crediting period. Most often it is less than one month. In some cases - two or more, but this is a rarity. It means not the period during which the client in principle has the ability to take money, but then, after what time he should return them in full. The interest rate on such loans is usually higher than for a normal loan, but the number of required documents is much lower. And another important point: most often, no provision is required.

Overdraft credit agreement

This document is not much different from the usual contract for standard lending. The main differences are conditions that are characteristic only for such a system as overdraft lending, as well as rigid binding to the current account (for legal entities). Many banks stipulate the possibility of compulsory debiting of money from a potential borrower's account in the event that he does not repay his debt on time for one reason or another. The contract is executed on a standard form, includes the details of both parties, clearly specifies the financial part of the issue (how many, where, to whom, when, and so on), and most likely will contain clauses on force majeure and non-return conditions. Sometimes there is also other information that may be required in accordance with current legislation, bank regulations, customer wishes and so on.

Example for a legal entity

The enterprise constantly receives on 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 the contract, the company gets the opportunity to use not only the money that it has in its account, but also those that the bank gave it. Suppose that the company has an opportunity to conclude a very profitable transaction, but it lacks its own funds for its implementation (it urgently needs to expand, purchase materials, etc.). And at that moment she can take the reserved money and fulfill all the conditions, after which she can get additional profit. At the time when the loan needs to be returned, the firm receives an increased income already on its account, which the bank immediately sends to repay the debt. This was the simplest and most visible example of overdraft lending.

Example for an individual

In the case of ordinary people, everything looks even easier. A person receives a card from the bank, which he can both use and not use. There is a fixed amount. The client comes to the store and sees the goods that he wanted to buy for a long time, but there was no money or other opportunities. And here 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 eventually buy the goods after the end of the action in the store, at a much higher price. And with the help of this card, he pays for the purchase immediately and, most likely, saves much, especially if he can repay his debt in a short period of time.

Overdue

This is a global problem for all overdrafts. True, most often it applies to individuals who can not or do not want to return previously received funds. If the amount for the bank is insignificant, then the person can simply be lucky, and if not forgotten, then at least the solution of the problem will be postponed for a long time (during which "very high interest" will drip). But, of course, sooner or later it will still have to be returned. Once 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 lack of the need to provide bail, the lack of payment for the money that was not used by the client, and the instant provision. That is, a person or a legal entity may be interested in this or that 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, but such a system makes it possible to hold customers, attract new customers and even make small profits. More often than not, financial institutions earn more not on loans themselves, but on various services related to them. For example, a borrower may like working with this bank, and he decides to place a deposit there, take a larger loan, receive wages, a pension or other options through it. As a consequence, the total yield from one loan grows many-fold, and in many banks this feature is taken into account, which allows to offer potential borrowers an overdraft at interest rates that are lower than market ones. Naturally, this is already convenient for customers who have the opportunity not only to get "cheap" money, but also to be served in a suitable bank.

disadvantages

Of course, an overdraft card or a similar loan also has some drawbacks. The main of them is an extremely short period during which you can use money. Unlike the standard form of lending, which provides for a year or even several years, an overdraft, it is often necessary 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 client's knowledge, which irritates very many and can ultimately lead to significant losses. Among other things, some fraudsters use fake documents to obtain loans of this type due to the fact that no special papers are 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 his signature is not on the contract, and the financial institution starts to suffer losses. The least problems with legal entities, because you can always write off the amount of debt from the company's current account. However, if there is no money on the balance sheet and it is not foreseen, then again there is a problem with the return of unsecured funds. It should be noted that many banks have special services that track changes in the amounts of receipts to the borrowers' account and raise the alarm if the situation begins to deteriorate. In this case, the financial institution can simply close the overdraft, completely depriving the enterprise of access to borrowed funds.

Results

Despite the presence of shortcomings, on the whole this system is very advantageous and convenient, especially for customers. It allows you to receive as much money as you need in time, which in turn allows private individuals to purchase goods that are necessary, and legal - to invest additional funds in their activities, receiving much more than they will have to return, even if the accrued interest . The main thing in all this is the timeliness of repayment. Even a small delay can gloss over the credit history globally, which will not allow borrowing in other banks, and penalties, commissions, interest and other payments, which in the end will still have to be repaid, can exceed all reasonable limits and even the original loan amount.