A Comprehensive Guide to the Most Common Types of Credit Given by Banks to Companies

Explore the various types of credit facilities offered by banks to support businesses in managing their operations, trade, and growth.

Introduction

Credit is the lifeblood of business, enabling companies to sustain operations, manage cash flow, and invest in growth. Banks play a pivotal role in providing tailored credit solutions to meet the diverse needs of businesses, from multinational corporations to small and medium-sized enterprises (SMEs). This article explores the most common types of credit offered by banks to companies in the United States, Australia, the United Kingdom, and Canada, categorized by their structure and purpose. We also provide detailed examples, benefits, and relevant insights to aid businesses in making informed financial decisions.

1. Credit by Disbursement

These types of credit involve a direct transfer of funds from the bank to the borrower or a designated recipient. They are commonly used for immediate operational needs, capital investments, or bridging cash flow gaps.

1.1. Cash Facilities

• Definition: Short-term loans that provide immediate liquidity for working capital requirements.
• Features: Typically unsecured for smaller amounts but may require collateral for larger sums. Interest rates are often higher for short-term facilities due to their flexibility.
• Use Cases:
  • 1: A small retailer secures a $50,000 cash facility to purchase holiday inventory.
  • 2: A construction firm uses a cash facility to cover payroll during project delays.

1.2. Overdraft

• Definition: A pre-approved credit line attached to a company’s bank account, allowing withdrawals beyond the available balance up to a certain limit.
• Features:
  • Interest is charged only on the overdrawn amount.
  • Provides flexibility for managing daily cash flow needs.
• Example: A manufacturing company in Canada uses an overdraft to pay for urgent raw material purchases before receiving customer payments.

1.3. Discounting

• Definition: The bank purchases receivables such as bills of exchange or promissory notes at a discount, providing the business with immediate cash.
• Example:
  • A UK-based exporter sells invoices worth £100,000 to a bank at an 80% advance to manage cash flow while waiting for overseas payments.

2. Credit by Guarantee

These credits involve the bank acting as a guarantor for a company’s obligations. They enhance trust between parties, particularly in international and large-scale transactions, and reduce risks for the beneficiary.

2.1. Customs Guarantees

• Removal Credit: Guarantees that import duties will be paid for goods temporarily in transit or under customs control.
• Bonded Obligations: Used in bonded warehouses to defer payment of duties until goods are released for sale.

2.2. Administrative Guarantees

• Retention Guarantees: Ensures repayment of retention amounts in construction contracts.
• Advance Payment Guarantees: Secures repayment of advances made to a contractor.
• Provisional and Definitive Guarantees: Often required in tender processes to ensure contract compliance.

2.3. Standby Letter of Credit (SBLC)

• Definition: A financial instrument guaranteeing payment to the beneficiary if the borrower fails to meet obligations.
• Global Example: A Canadian energy company uses an SBLC to backstop a major international contract for infrastructure development in Asia.

3. Campaign Credit

• Definition: Short-term credit designed for businesses with seasonal operations, such as agriculture, tourism, or retail.
• Features: Typically repaid at the end of the campaign or season when revenue is realized.
• Example:
  • In Australia, a wheat farmer secures a campaign credit to purchase seeds and fertilizers, repaying it after the harvest sale.

4. Advance on Merchandise (ASM)

• Definition: A credit facility where banks provide funding against goods pledged as collateral.
• Features: Common in trade finance and used extensively by exporters.
• Example: A US-based exporter of electronics uses ASM to fund production while awaiting payments from international buyers.

5. Industrial Warrant

• Definition: A secured credit facility where loans are backed by industrial products, machinery, or goods.
• Example: A Canadian mining company uses its inventory of unprocessed minerals as collateral for a short-term loan.

6. Pre-Financing in Foreign Currency for Exports

• Definition: Exporters receive loans in foreign currency to finance production and shipping costs before payment is received.
• Benefits: Helps mitigate currency exchange risks and accelerates cash flow for international trade.
• Example:
  • A UK textile company receives USD-denominated pre-financing to fulfill a bulk order from a US client.

7. Import Documentary Credit

• Definition: A bank guarantees payment to the exporter upon submission of shipping and compliance documents, ensuring secure transactions.
• Features: Commonly used in international trade to build trust between buyers and sellers.
• Example: A Canadian automobile importer uses a documentary credit to purchase vehicles from Germany.

8. Temporary Admissions & Imports

• Temporary Admissions: Credit mechanisms for goods brought into a country for a limited period without paying duties, provided the goods are re-exported.
• Temporary Imports: Credit for bringing in goods temporarily, such as for trade shows or testing.

9. Advances on Receivables from Abroad (ACNE)

• Definition: Credit extended against confirmed foreign receivables, allowing businesses to access funds immediately.
• Example: An Australian wine exporter uses ACNE to manage production costs while awaiting payments from European buyers.

Conclusion

Banks offer a wide range of credit facilities tailored to the needs of businesses. These products, whether by disbursement, guarantee, or trade-specific mechanisms, are essential for sustaining operations, financing growth, and mitigating risks. Companies must carefully evaluate their options, considering costs, terms, and collateral requirements.

References

1. Federal Reserve Bank of New York (2023). Business Credit and Liquidity Trends in the US.
2. Reserve Bank of Australia (2023). Trade Finance Facilities in Australia.
3. Bank of England (2023). Corporate Lending Overview in the UK.
4. Bank of Canada (2023). Financial Products for Canadian Businesses.
5. International Chamber of Commerce (ICC) (2023). Trade Finance Practices and Standards.