Credit, Loan and borrowing

Credit, Loan and borrowing

Credit is a loan borrowed by a company or an individual from banking or non-banking organization or a financial institution.

Every company, irrespective of the profit it makes, maintains a secure credit line to ensure that the finances are not imbalanced. The credit line is maintained to ensure that the company has a separate account to fund its ongoing programs. The credit could be taken to employ it as working capital or to fund an acquisition of a rival company or any company that could add to the existing company's product portfolio.

Credit is offered under various schemes depending on the choice of the borrower. The character of the borrower could be a business firm operated by partners or individual proprietors of companies. The interest rate on the loan offered differs and is dependent on the nature of the company. If the company has adequate fixed assets such as building, land and machinery, the interest component could be lower. It is so because the company will be in a position to leverage the fixed assets in case it fails to find sources to repay the credit. However, the loans given to services organizations, which have nothing to depend upon other than proven track record and human resources, will be steep, slightly on the higher side. This is so because the company has very little to offer in terms of collateral for the loan being borrowed. Besides, the credit given to services organization is less and of short term range. Since the interest rate is higher, the repayment period is also short. The loan will be recovered at the earliest using the equated monthly installment scheme. If there is no collateral to be offered to the banks and financial institutions, credit flow will be difficult. The credit line depends on the performance of the company and the repayment being made from time to time.

Some companies bank on the credit line to run their day to day operations. For instance, a small or medium enterprises, would have borrowed a small sum as loan towards the working capital. The fund could be utilized towards purchasing the raw material required to evolve the product. Once the product is out of the assembly line and reaches the retail stores, the credit repayment would start then. Then another loan is borrowed. If the credit line, including the repayments, is done in time, a company can maintain a sound credit line. By adopting this approach, a company can come out of the credit line and bank on internal accruals of the period to run the company for the rest of the period. It can also enter the profit making mode in the process.

If the credit line is not clear, there is the fear of the company entering the bankruptcy stage, which is bad for any performing firm. In order to ensure that a company does not enter the bankruptcy stage, adequate safeguards are required. It includes securing the funds through low interest rates and deploying them sensibly. By doing so, companies can make sure that there is appropriate return on the investment.

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