Understanding Credit Opening Agreements: Benefits and Obligations
1. The Opening Credits
The opening of credit through this agreement allows the bank to commit to making available to the client a sum of money as a partial ceiling. The customer can access and be reimbursed by withdrawing funds, applying interest on the amounts actually used. It’s an evolved form of a loan, offering more flexibility. It’s a common banking operation today. Its economic purpose differs from a loan, where the funding amount is set beforehand. The opening of credit is designed to better suit individual customer’s financial needs, as it doesn’t require a complete withdrawal of funds. Furthermore, amounts drawn and repaid may be subject to new regulations without exceeding the credit limit granted.
Therefore, the economic function of the contract is to ensure the substantive provision, not just the availability, of a certain amount of money to use during the agreed period. This contract is characterized by more flexible credit, making it suitable for professionals and business people who may use such amounts to meet existing or arising needs. By having this agreement, the employer may face needs without resorting to obtaining a loan. Even if the need doesn’t arise, the employer is better off despite paying an origination fee and the cost of unavailability.
A) Duties
The opening credit contract creates obligations for both parties. Upon finalization, the bank agrees to make available to the client the agreed amount of money. This obligation, known as the availability period, requires the customer to pay a commission on the loan amount. The opening entity is free to set this commission as a percentage of the maximum credit granted.
Once the provision has expired, or sooner if the client has already used the funds, the amount of credit is fixed on the amounts already used. The contract’s flexibility allows repayment of principal without a rigorous schedule. No penalties are applied for early repayment. Interest is only applied to the amounts actually used. The bank will charge several commissions, such as a commission to compensate for the declining profitability of the funds and a commission for the unavailability of funds. This is calculated by applying a percentage to the difference between the maximum granted and the amounts actually used.
The rationale is to pay the credit institution for maintaining idle funds available to the client. Another commission, called the account management commission, is generally applied if the number of entries in the account exceeds the minimum.