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What is Credit
The term credit indicates in any form temporarily provided finance that are required under the agreed terms to return.

Credit (in commerce, finance) indicates in any form of temporarily provided finance that are required under the agreed terms to return. The credit provides a creditor to a debtor. In terms of corporate accounting, credit becomes foreign equity (source) on the liability side in the balance sheet and it is used to purchase assets. Interest and other expenses associated with the acquisition are costs of credit provision.

Meaning of Credit in Accounting is here.

Providing credit is one of the financial services of financial institutions. Most banks offer credit. The main criteria when deciding about granting a credit from a bank are:

Payback period affects primarily the amount of income attainment of the debtor. Its profitability depends mainly on the interest rate.

What are the basic types of credits or loans ?

  • Acceptance Credit - a credit where the bank on request of the client (debtor) accepts a promissory note issued to it by client, i.e. it undertakes to pay the promissory note for the debtor within the due date. By the acceptance credit the bank doesn’t give to debtor any money, but takes his commitment
  • Buyer‘s Credit - a form of trade credit, which is provided by a supplier to the customer in the form of a advance on goods supplied
  • Consumer Credit - cash provision or deferred payment, for example in the form of credit, loan or lease, for which the consumer is required to pay
  • Discount Credit - a loan arising from repurchase of securities (mostly promissory notes) prior to the period of their maturity (discount)
  • Financial Credit - a provision of funds in a currency, which is linked to the obligation of their repayment in cash; a cash loan, mortgage, consumer credit, financial leasing is considered a financial credit.
  • Aval (Guarantee) Credit - a loan that is represented by a provided guarantee to the client for his liabilities. The banks doesn’t provide funds directly, doesn’t accept the liability, but is liable for its payment
  • Investment Credit - purpose-assigned bank credit granted for financing investments
  • Lombard Laon - a short-term loan secured by a pledge of movable assets (mainly securities, jewelry, precious metals, or certain commodities). Lombard credit is provided by banks. Central bank provides it to commercial banks against a pledge of securities (for a Lombard rate)
  • Mortgage Loan - a loan whose repayment including accessories is ensured by the security right to the real estate, even under construction
  • Negotiation Credit - a modification of the discount credit, when negotiating bank discounts bills of the exporter (creditor) issued to the importer (debtor), an initiative of the discounting lies on the importer
  • Overdraft - short-term loan provided under certain conditions for normal bank account (overdraft account). The credit is up to a fixed amount (credit limit) automatically drawn from the account, while expenditures exceed the balance (there is a “negative balance”)
  • Operating Credit - a form of credit for short-term financing of operational needs of the enterprise
  • REPO operations - a loan provision with securing transfer of securities. The debtor agrees to the creditor that he transfers to him agreed quantity of fungible securities against payment of certain funds (hedge transfer against loan drawing), and the creditor agrees to a specific date or at the request of the debtor to convert securities back to debtor against paying agreed sum of money (principal with an interest)
  • Revolving Credit - a loan that has for a given period agreed financial limit and the client can during its repayment repeatedly draw funds up to the limit
  • Syndicated Loan - a loan provided by several creditors (banks) together. The creditors conclude with a client shared syndication loan agreement
  • Trade Credit - a loan resulting from ordinary business operations among entrepreneurs (deferred maturity, providing backup, etc.)
  • Vendor Credit - a form of trade credit, which is provided by a vendor to the customer in the form of deferred payment for delivered goods. It is often covered by promissory notes that the supplier can discount at the bank, which converts supplier credit to bank credit (discount)

In the banking sector is also possible to use a special financial credit services, which can be classified into:

  • Factoring - the purchase of short-term receivables prior to their maturity
  • Forfaiting - the purchase of medium and long-term receivables prior to their maturity
  • Leasing - a lease of capital equipment, durables and other items at the agreed rent for a definite or indefinite period

Related terms and methods:

Related industry / sector:

Related management field:

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Last update: 28.02.2016

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