Credit lending is a credit transaction that describes the provision of a credit institution's creditworthiness for a company. The credit institution makes its own creditworthiness available to the borrower, i.e. its customer. Companies often use their house bank's credit lending to obtain a loan from another credit institution (creditor) or to receive services from suppliers in advance. Credit lending is not a loan of money. No money is lent to the borrower here; only the pure creditworthiness is provided.
If the company does not have sufficient creditworthiness and the credit institution from which a larger loan is to be requested, or the supplier, therefore has no confidence in a financing cooperation, the company's house bank can provide additional security with a credit lending.
As a rule, lenders and suppliers trust other credit institutions and are willing to pay out the requested loan to their customers because of the creditworthiness guaranteed by the house bank. Thus, three parties are involved in credit lending — the company (the borrower), its house bank and another party, either the lending bank or the company's supplier.
Credit lending is used frequently in four different types of credit transactions. These include the acceptance credit, the aval (guarantee) credit, the letter of credit and the supplier credit, the latter being common only for companies that act as merchants. There is also a reimbursement credit used as credit lending, but this is only used in foreign trade transactions. This reimbursement credit is therefore usually employed overseas.
The acceptance credit as a type of credit lending
The acceptance credit is considered a particularly commonly used form of loan. In this case, a credit institution (creditor) commits itself for its customer by means of a bill of exchange. This bill is recorded in a document that can only be transferred by endorsement and thus can serve as very valuable security. The lender who accepts a bill hands this document to its customer, who has an obligation to a third party, usually the lending bank.
If the obligation in the form of the agreed loan is not paid, the company's house bank is liable for the outstanding repayment.
The aval (guarantee) credit
With the aval credit, credit lending does not take place via a bill but through the direct assumption of guarantees by the company's house bank. These guarantees are important to the lending bank because they also serve as proof of the house bank's creditworthiness. Guarantees and other assurances can also play a role in the aval credit, which is often referred to as a bank aval.
Because guarantees are legally controversial and not clearly defined documents in banking law, a bank surety is usually used instead. This also means that in the event of the company's inability to pay, its house bank must stand surety and take over the repayment of the loan.
The letter of credit as credit lending
The letter of credit is also considered a common loan form in which credit lending plays a certain role. Fundamentally, a letter of credit is an instruction that the applicant gives to their bank, which provides that a certain amount is to be transferred to a third party at a specified time. Usually, the payment of the letter of credit is linked to certain conditions, such as the provision of services.
If the applicant cannot make the amount available at the time of opening the letter of credit but only upon receipt of the documents (also called the time of the letter of credit), this is considered credit lending, since the bank is liable for the applicant for the period between opening and receipt of the documents.
Supplier credits
With a supplier credit, the supplier does not grant its customer or the company being supplied a loan in the form of money, but grants a payment term. This payment term typically ranges between one and three months. During this time, the supplied customer can already resell the ordered goods and use the proceeds to repay the invoice amount to the supplier.
Because many suppliers are very skeptical with new customers, they often require security in the form of credit lending. If a customer, in turn, settles the obligation from the delivered goods earlier than the agreed payment term, they usually receive a so-called cash discount.
Costs of credit lending
The company that asks its house bank for a credit lending must pay a fee or commission. Thus, credit lending is part of the service side and an important component of the bank's financing. The fee that the respective company must pay depends on the amount of the loan for which the house bank is liable.
Usually the company's house bank charges a certain percentage as a fee, which is typically about one percent of the loan amount and must be paid directly by the company.
Step by step to credit lending
There are only a few bureaucratic steps for a company to obtain credit lending. In principle, one can directly ask a lender for a loan for certain investments and try to obtain it without credit lending. If this request is rejected, one should ask their own bank for credit lending. If the house bank confirms and grants a credit lending, it is possible to apply again to the other credit institution for a loan. As a rule, this loan is then granted.
From experience and to reduce further bureaucratic effort, companies usually go first to their house bank and then to the lender to obtain a loan with credit lending. Sometimes a credit lending is also recorded in a document and is valid for a certain loan amount over a longer period. In this case, the company does not have to go to its house bank first and ask for credit lending.
Credit lending for private individuals
In theory, credit lending in credit transactions is also available to private individuals, but this is rather rare. One possibility would be the use of a rental guarantee (rental aval). This can avoid the need to deposit a rental security deposit. The bank covers the deposit, so the tenant does not have to have that money available. In most cases, however, it is not worthwhile to incur additional fees for credit lending on small personal loans. Instead, other collateral options are more suitable for smaller loan amounts, such as calling on a private guarantor. In addition, for larger purchases private individuals can use specific purpose loans, such as a car loan or a private home savings contract. In these cases, security is typically provided by a land charge (mortgage deed) or by life insurance policies.