It is not always easy for entrepreneurs who want to apply for a loan. As with private individuals, the credit rating always plays a decisive role in lending for self-employed persons and companies. Creditworthiness is used by credit institutions to assess their creditworthiness.
In this post, learn what a line of credit is and how it affects corporate credit.
1 – What is a line of credit?
The credit line is the upper limit up to which a loan can be granted. The line of credit is also known as the credit line, current account credit, credit limit or credit limit. It is the maximum limit for a loan that is agreed between the borrower and the credit institution. This line of credit depends on the borrower’s credit rating. The better the company’s credit rating, the higher the credit line can be set.
A decisive criterion for the amount of the credit line is the regular cash receipts on the current account of self-employed and companies. If these incoming payments are high enough, a high credit line can be granted. This line of credit is critical to the overdraft facility granted by the bank to the checking account. For self-employed and companies, this overdraft is referred to as a current account credit, while it is known to private individuals as an overdraft facility. It is an agreed credit line. The credit line is the maximum amount that you can use in addition to your existing balance.
2 – Agreed and tolerated credit line
The credit line differentiates between the agreed and tolerated credit lines.
The agreed credit line is the normal overdraft facility that the bank grants for the checking account. This overdraft facility and its amount are contractually agreed. As a current account holder, you can overdraw your current account up to the amount of the agreed credit line.
In contrast to the agreed credit line, no credit line is contractually agreed for the tolerated credit line. The bank tolerates the overdraft of the checking account up to a certain limit. Companies and the self-employed should not overdraw the company loan for longer than three months.
3 – Types of credit for which lines of credit are granted
A current account credit for the current account is a typical loan for entrepreneurs and the self-employed, for which a credit line is granted. The credit line marks the maximum amount up to which the current account credit can be drawn. A credit line can also be granted for guarantee credits. A guarantee loan is a guarantee or guarantee given by a bank to the company. The bank does not pay out money, but takes over a guarantee. Companies and entrepreneurs can avail themselves of such guarantee loans for various purposes. A line of credit can also be granted for Lombard loans, which are short-term financing and where securities or movable property serve as security.
A credit line is only set for current accounts.
A credit card is an exception. There is also a credit line here. It is the monthly budget. In contrast to the current account credit, there is usually no interest when using the credit line for the credit card.
4 – Determining the amount of the credit line
There are no legal regulations for determining the credit line. The banks are free to decide on the amount of the credit line and are not obliged to grant a credit line. Banks use various calculation methods, but they rarely make them public. Incoming payments to your checking account play a crucial role in granting a line of credit. As the earnings of entrepreneurs vary from month to month, some banks may have problems with a line of credit. Some banks require receipts of the same amount for a credit line.
Entrepreneurs and companies experiencing a financial bottleneck because customers do not pay on time should contact their bank and seek the conversation. If various types of collateral can be proven, it is possible that a credit line will be granted.
5 – The credit line as a revolving loan
The credit line represents a so-called revolving credit. While an installment loan is usually paid to a separate account and repaid in monthly installments, the credit line applies to the current checking account. It can be used as a revolver. This means that no application to the bank is required to use the credit line. If there is enough money in the checking account, the credit line can be repaid in the meantime in order to be used again afterwards. The user of the credit line is not obliged to make regular repayments. This revolving loan must be repaid, but unlike the installment loan, there are no fixed agreements.
The borrower can determine how he wants to repay the revolving loan. However, repayment can affect the amount of the credit line. If the credit line is repaid late and only with small amounts, the bank can set the credit line lower.
6 – The line of credit and the interaction with corporate credit
A credit line generally interacts with the credit rating. Companies and companies that have good personal and business credit ratings can get a higher credit line than those with an unfavorable credit rating. The company’s credit rating depends on various factors. A good order situation, punctual incoming payments from customers, but also the punctual payment of credit installments, the fast payment of invoices and the use of discounts have a positive effect on corporate creditworthiness, which can lead to a high credit line. In the opposite case, the credit line can also affect the company’s creditworthiness. A high credit line speaks for a high credit rating, since the higher the income and sales of a company, the higher it is set.
7 – Benchmark for corporate credit – the line of credit
The credit line is often used by banks to assess corporate creditworthiness. A high credit line from the company or entrepreneur indicates a good credit rating. Credit bureaus and banks derive high sales and high income for companies and self-employed from a high credit line. It does not matter whether the credit line is actually used.
Always keep an eye on corporate credit
In order to have good chances in granting a loan, as an entrepreneur it is always important to always have a good credit rating, both privately and commercially.