Credit Line In accounting

Credit Line In accounting

We explain what is a line of credit and some of its features. Also, its difference with a loan.

The current line often operates as a credit support to current accounts.

1. What is a line of credit?

A line of credit is a credit tool offered to governments , companies or individuals by banks or financial consortiums, which stipulates in advance a total amount that is made available to the applicant, usually in a bank account or some financial instrument, from where you can have funds to reach the top.

The line of credit has the virtue that interest is paid only for the amount withdrawn and not for the total loan agreed.

Often this type of financial tools require a collateral: an asset that serves as a guarantee of payment of money and that serves as a guarantee to access credit. This is because, together with the capital loaned, the applicant must return interest and stipulated commissions, and all in a certain period of time and with a certain periodicity.

In common banking, credit lines are known as credit  accounts  and often operate as a credit support to checking or checking accounts . In this way, if the account holder issues a check or makes a payment and his balance is not enough to cover the amount requested, the check is not returned or the transaction is rejected, but it is covered with money from the line of credit. credit, which must then be paid to the bank according to specific conditions; a bit to the way of using credit cards.

See also: Banking Credit .

2. Differences between line of credit and loan

In the majority of the loans the determined amount is given at the moment of your request.

Although loans and lines of credit are forms of liabilities , that is, forms of borrowing money, there are important differences between both concepts, such as the following:

• Delivery of money . In the majority of the loans the applicant is given a certain amount or requested at the same moment of his request, under the commitment of payment of the amount requested plus interest and commissions, according to a period and a periodicity of payment. In the line of credit, however, a maximum limit of money is established and the applicant is provided whatever he or she wishes (below the cap, obvious) and interest and commissions are charged only for the amount withdrawn, not for the total amount prescribed. .
• Return of money . As in the previous point, the loans are paid in full at the time of expiration, unless there has previously been an amortization; while the credit lines charge the requested balance upon expiration, which may be much lower than the maximum limit set.
• Interest rate . The amount charged for interest on a loan is always lower than the amount for the lines of credit. In addition, in many lines of credit, commission of services must be paid for the amount not yet requested, to guarantee its availability.
• Renewal . Lines of credit can be renewed as many times as desired, provided that the credit issuer so guarantees; while the loans can not be extended or renewed: they must be paid at the end of the fixed term, in any case being able to be paid with money coming from a new loan that would come to replace it.
• We explain what an action is and the types of actions that exist. In addition, what are the common actions.

  

  The shares are documents that assign ownership of a part of the share capital.

  1. What is an action?

  In the financial sector, known as action one security issued by a given society , and is equivalent to the monetary value of one (1) of the same parties in the capital of fragmented business .
  
  That is, stocks are investment documents that you assigned to the holder ownership of a portion of the principal social , which will be higher in the more shares you have. The holders of these securities are known as  shareholders .
  
  Commonly, the shareholders of a company enjoy political rights (vote at shareholders' meetings to decide on business management), and economic rights (receive benefits from the company and eventually earn profits in relation to the number of titles they manage).
  However, since the shares  are usually freely transferable , there are usually majority and minority shareholders, the former always with greater decision-making power when handling larger portions of the corporate capital stock.
  
  The return of the shares, that is, the money they generate to their holder, is usually considered an investment in variable income, that is, that lacks a fixed payment determined by contract in advance, but varies according to the performance of the company and Obviously, the amount of shares you have. But all the shareholders of a successful company receive economic benefits from it.
  The purchase and sale price of an action will depend on the financial situation of the company at the time of the transaction. In many cases, the purchase of cheap shares and their subsequent more expensive sale is an indicator of good business performance, so that their ownership is part of the assets of each investor . This value has different mechanisms to quantify and allocate, as occurs in the stock market indices (the stock market).
  

  2. Types of actions

  

  Limited voting shares give the right to vote only on certain issues.

  There are the following types of actions:
  
  • Common or ordinary . They give the possessor a share in corporate assets and the right to voice and vote in the corporate boards of the company.
  • Preferred . Shares with a generally fixed dividend rate, with payment preference over the common ones, for various financial reasons.
  • Of limited vote . They give the holder the right to vote only in certain business matters, in exchange they tend to be preferred or give a higher dividend than the common shares.
  • Convertibles . Those actions that can be converted into bonds (although the usual is that it happens in reverse).
  • Of industry . Instead of providing capital to the company, the holders provide services or a specific job and receive shares in return.
  • Released . Those that do not require payment by the holder, since they are the payment of benefits or utilities that the latter should have received.

  3. Common actions

  

  Common shares lack an expiration date and are negotiable.

  Common shares are, first and foremost, financial assets. They lack an expiration date , are fully negotiable and represent a small portion of the company's property.
  Its issuance usually responds to urgent financing needs, but it is the most expensive way to raise funds , since the returns generated in the future must be allocated to the benefit of the shareholders.
  In addition, selling shares means losing the autonomy of the company in some way, since shareholders usually gain voice and vote in decision-making.
  The shareholders also have a limited liability in the company, that is, that their personal assets will not be at risk before the performance of the company nor will they automatically form part of the company's total assets.
  In this way, a common shareholder can not lose more than his economic contribution to the company (equivalent to a defined number of shares purchased, for example).