Financial Instruments: Roles, Maturity, and Loan Types
Key Roles in Payment Orders
Understanding the parties involved in a payment order is crucial:
- The Drawer (or Gyrator): Issues the money order and prepares the document.
- The Drawee: Accepts the payment order by signing the document, thereby promising to pay. The Drawee takes responsibility, often indicating the place or domicile where the creditor will receive payment.
- The Beneficiary (or Taker): Receives the sum of money at the appointed time.
Financial Concepts of Maturity
Average Maturity: Occurs when the sum of the nominal capital to be substituted is equal to the nominal capital it replaces.
Common Maturity: Refers to a time when a single capital amount replaces a number of capitals of different maturities, ensuring no substitution occurs in the total value.
Lending Operations by Financial Institutions
When a financial institution offers lending, the customer acquires the obligation to repay the principal amount plus commission and interest within an agreed timeframe.
Understanding Loans vs. Credit Accounts
A financial institution may make funds available to a client in a credit account, allowing the client to draw money as needed up to a maximum limit. Interest is typically calculated only on the amount utilized.
Conversely, a loan operation usually involves granting a fixed amount upfront. These operations are typically medium to long-term, and repayment is normally structured through regular payments (monthly, quarterly, or semi-annually). This structure helps clients better organize their personal finances and payments.
Personal Loans and Guarantees
Personal loans are generally granted to individuals for private use. Therefore, they usually require personal guarantees (such as co-signers) or collateral (such as pledges or mortgages). The full loan amount is typically deposited into the customer’s account, and the customer must pay interest calculated on the entire granted amount starting from day one.
Detailed Types of Financial Loans
Banks and other financial institutions provide funds through various personal or commercial loans. Examples of personal loans include auto loans, credit cards, and mortgages, while commercial loans fund business operations. Below are detailed options:
Short-Term Loans
These are among the most common loans, generally extending for less than a year. This class of loan provides interim capital for businesses experiencing a temporary need for liquid funds. It is common practice to repay the full amount once accounts receivable or inventory are liquidated.
Intermediate-Term Loans
These loans are commonly used to start a business, obtain new equipment, expand operations, or increase working capital. The maturity term typically ranges from one year to three years.
Long-Term Loans
Long-term loans usually occur when there is a prospect of significant capital investment in assets or when starting a major business venture. The maturity term for these loans ranges from three to five years. These loans are generally backed by the duration of the assets obtained. Payments are typically monthly or quarterly.
Line of Credit (LOC)
A Line of Credit offers the advantage of obtaining funds on multiple occasions without having to file a new application, up to the established credit limit. An LOC is particularly important for businesses that experience seasonal changes in cash flow. The lender usually conducts an annual review, during which the borrower is asked to provide updated financial statements.