Features of lending to legal entities

Types of lending to legal entities

Successful business requires a sufficient amount of working capital. Moreover, if its development is required and investments are needed. The easiest way to get the necessary financial resources for the company is lending in a bank. Let’s take a closer look at the main types of loans for legal entities available today on the Russian financial market.
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Features of lending to legal entities
Types of loans for legal entities
Overdraft
Credit line
Target loan
Revolving credit
Investment loan
Leasing
Factoring
Commercial mortgage
Terms of lending to legal entities
The procedure for issuing a loan to legal entities
Frequently Asked Questions
What are the features of lending to legal entities?
What criteria should be taken into account when choosing a bank for cooperation?
What types of loans to legal entities should be classified as the most profitable?

Features of lending to legal entities

The granting of loans to organizations is based on the same basic principles as to individuals. The main feature of lending to legal entities is the almost mandatory provision of collateral for the borrower’s financial obligations in the form of collateral. Otherwise, the principles traditional for this banking service are implemented:

repayment, which provides for repayment of debt to the bank;
paid nature, expressed in the need to pay interest;
urgency, assuming a certain period of validity of the loan agreement;
immutability, the essence of which is the impossibility of unilateral changes in credit conditions;
contractual regulation of the relationship between the lender and the borrower, which results in the mandatory execution of the contract, and an impressive set of requirements is imposed on the content of the document.

Do not forget about another important condition. It consists in the need to comply with the terms of the loan transaction with the current requirements of Russian legislation.

Types of loans for legal entities

The classification of lending to legal entities into types is carried out according to several criteria. Among them:

destination (target or not);
form of provision (in cash or in non-cash form);
method of issue (one-time, overdraft or credit line);
urgency;
repayment option, etc.

The most popular types of lending to legal entities deserve special attention. The distinctive features of each of them are discussed below.
Overdraft

It is a revolving credit line. It is concluded for a period of one, less often – for two years. The borrower gets the opportunity to spend money in excess of the amount on the account, with the obligation to return within 1-2 weeks. Repayment of the debt occurs by automatic write-off of funds after the next receipt.

The credit limit is usually set depending on the current account turnover and is about 15-40%. Overdraft is one of the few types of lending to organizations without providing collateral. The funds are spent by the borrower at its own discretion.
Credit line

It is a revolving loan with a fixed limit, valid for the period specified in the contract. The borrower takes the required amount on a separate application, but necessarily within the limit. If desired and possible, the debt is repaid on a similar application. The number of such operations is not regulated.

The principal difference between a credit line and an overdraft is usually a more serious amount and term of financing. Therefore, the borrower is required to make a pledge. The main advantage of this method of lending is the ability to minimize debt servicing costs by directing free funds to repay obligations to the bank. The bonus is the absence of the need to issue individual loans, as it is much easier and faster to get one credit line for a long time.
Target loan

Its main difference from most of the alternative financing options is the targeted spending of funds. The Bank controls payments made by the borrower. For example, when receiving a loan for the purchase of a car or equipment, the client must confirm the direction of money for these purchases.

The targeted nature of lending usually reduces the cost of the service. Therefore, financial resources are issued at a more favorable percentage. This is compensation for the reduction of freedom to dispose of borrowed funds at their own discretion.
Revolving credit

In this case, the money is given to replenish working capital. They are spent on current business goals, for example, the purchase of raw materials or the payment of wages. In fact, a revolving loan resembles an overdraft, but is larger in size, and therefore requires collateral. Depending on the rules of a particular bank, it can be both one-time and in the format of a credit line.
Investment loan

A kind of targeted lending. A mandatory requirement for the provision is spending funds exclusively on investments. In other words, the result of financing is an increase in the company’s fixed capital.

Distinctive features of an investment loan are:

a large sum;
registration of collateral for the acquired assets or other property of the borrower;
confirmation of the effectiveness of upcoming investments with the help of a business plan;
a long term of financing, often amounting to or even exceeding 7-10 years.

Leasing

Another name for the service is financial lease. It is a targeted lending for the purchase of various equipment, special equipment or vehicles. Ownership of the property passes after full payment of the debt. Leasing is characterized by a long term and relatively favorable financial conditions. Another serious advantage is the accelerated depreciation of the acquired property, which allows optimizing tax payments to the budget.
Factoring

It is a type of lending when the borrower receives the goods with deferred payment. It becomes possible because the bank or factoring company assumes the obligation to pay the seller. For this, the lender receives a certain percentage. It is usually higher than in classical lending, which is explained by the increased riskiness of such transactions.
Commercial mortgage

Another kind of targeted loan. Borrowed funds are used to purchase real estate, which is provided to the bank as collateral for the debtor’s financial obligations. It is allowed to issue collateral for other liquid and valuable assets of the borrower, but this type of lending is much less common in practice.

As with any mortgage loans, commercial mortgages are distinguished by a long term, which reaches up to 25 or even 30 years, and an impressive financing limit of up to 70-80 of the market price of the collateral. An important advantage of such lending is the lowest available interest rate.
Terms of lending to legal entities

The standard conditions for issuing loans to legal entities are traditional lending parameters, including:

the amount;
term;
the interest rate.

Another important condition of the loan agreement is the repayment schedule. The remaining parameters of the transaction with a certain degree of conditionality can be called auxiliary or additional. For example, the method of issuing funds or repayment of credit debt.
The procedure for issuing a loan to legal entities

The process of lending to legal entities is determined by the internal rules of a particular bank, factoring or leasing company. In general, it looks like this:

choosing a lender based on a set of criteria – from the proposed financing conditions to business reputation;
filling out an application for a loan according to the bank’s form;
provision of a set of related documents, the list of which is determined depending on the rules of the financial institution and the type of lending;
consideration of the application by specialists of the banking institution;
if approved, the terms of financing are agreed upon, the contract is signed and the money is disbursed.;
if the transaction is rejected, either the correction of the identified shortcomings with a repeated appeal to the bank, or a return to the first item of this list and the choice of another financial institution for further cooperation.

The above scheme is adjusted depending on the level of the relationship between the borrower and the lender, as well as the requested financing conditions. For example, current bank customers often immediately proceed to discuss the terms of the loan, bypassing the preliminary stages of the described procedure.
Frequently Asked Questions
What are the features of lending to legal entities?

The main distinguishing feature of this type of banking services is the provision of collateral. Such provision of financial obligations is almost always necessary. Other principles of lending are standard – urgency, repayment, paid nature, etc.
What criteria should be taken into account when choosing a bank for cooperation?

When choosing a bank to receive financing, it is necessary to take into account: the terms of lending, first of all, the interest rate, the level of requirements for the borrower, the percentage of approval of such transactions, etc.
What types of loans to legal entities should be classified as the most profitable?

The profitability of the loan is determined not so much by the terms of financing as by the effectiveness of solving the tasks facing the borrower. Therefore, absolutely any loan can be profitable with proper use – overdraft, target, revolving, etc.

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