Chapter 31: Short-term credit products

Question 1

Business credit products

Answer 1

Lender provides borrower with a sum/resource/service with a commitment to pay back

Usually used by SMEs/large enterprises/corporations

Question 2

Short-Term Credit Products

Answer 2

Term of up to 2 years

Question 3

Business current account credit facilities

Answer 3

current account for a company/gov org/ self employed person to be used to make and receive cashless payments (credit account)

Account holder always needs a positive (credit) balance

Credit limit agreed upon

Question 4

Interest

Answer 4

Debit interest: charge paid by customer to use credit facility. Only owed when account has a debit balance

Credit interest: charge paid by bank to customer on credit balance

IR = IR of ECB

Question 5

Commissions and charges

Answer 5

• usually a 1-off signing fee
• Borrower will have to pay credit comission when account has a debit balance
• Transaction handling fees

Question 6

Special types of credit

Answer 6

Seasonal influences on business performance (e.g. Ice cream) when less cash is coming in vs high season when lots of cash

Seasonal credit facilities available for these businesses

Question 7

Acceptance credit and promissory credit

Answer 7

Acceptance Credit: The buyer issues a bill of exchange, which the seller can take to the bank for immediate payment, with the bank later collecting the amount from the buyer’s bank.

Promissory Credit: Similar to acceptance credit, but the buyer issues a promissory note instead, with the bank providing short-term credit to the seller by discounting the note

Question 8

Factoring

Answer 8

A company sells its trade receivables to a specialized institution (factor). This includes risk acceptance of customer defaults, advance financing (70-90% of invoices), and management of accounts receivable and credit monitoring.