Credit in General
When applying for credit, the financier (e.g. a bank) provides information regarding the available credit facilities, main terms and conditions of credit, and applicable charges. When granting the credit, the financier will investigate the borrower’s solvency based upon all available information, and require the borrower to provide appropriate security.
The financier’s aim is to secure the claims by determining the success rate of the borrower’s business. The following is a short presentation of the most commonplace forms of credit financing:
An overdraft facility is best suited for cash management purposes in case of temporary cash deficits. The cost of the facility consists normally of both a fixed provision based on the credit line, as well as a variable provision based on the amount of credit actually used.
The terms of a standard bank loan and its price, i.e. the interest margin, are often tailored based on the borrower’s financing need, solvency and collateral value of available of collateral (real property or movable property, letters of guarantee).
in Finland, bills of exchange are normally used either to cover short-term, one-off cash deficits, or as a continuous credit facility within a set limit applicable to the bill of exchange.
A trust loan or a fiduciary loan is a loan granted by a third party where a bank acts as an intermediary, leaving the creditor unknown for the borrower.
In a securities repurchase agreement, or a so-called repo-trade, a bank or other counterparty purchases the borrower’s securities for a predetermined term, committing to resell the securities upon expiry of the term. The cost of the credit is determined based on the price difference between the purchase and sale of the securities, and regarded as interest for accounting purposes.
The terms of the credit and applicable documentation vary. For instance, a standard bank loan is often granted by way of a bond and an agreement that contains the amortization plan.