Companies pay for lines of credit in two ways first

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banks. Companies pay for lines of credit in two ways. First, the bank charges a percentage for unused portion of the credit line. This charge ranges from 25 to 100 basis points annually, and pensates the bank for standing ready to honor a company's cash demands. Second, the bank ges interest on the used portion of the line of credit. Letters of credit facilitate private international transactions. A letter of credit interposes a between the two parties to a transaction. The letter provides a guarantee of payment from buyer, is legally enforceable and, therefore, reduces the credit risk to the seller. The benefit - e letter of credit is that it substitutes the bank's (higher) credit rating for that of the buyer. IS of credit are used mostly to facilitate transactions when the two parties are in different tries. Recently, letters of credit have been used by land developers to ensure that the proposed tructure is built. Term loans are what we commonly understand by "bank loan." A company applies for the and if successful, receives a set amount of cash at the start of the loan (the principal). The agreement specifies periodic payments of principal and interest. Interest rates are either fixed oating and a term loan will usually mature between I and 10 years. Many banks actively et small-business term-loan programs that provide companies with needed operating cash or to purchase long-term assets such as equipment. Mortgages are loans secured by long-term assets such as land and buildings, which means the lender can foreclose on the mortgage and seize the property in the event of default. Mort- _ _ claims are filed with a public register such as local land title offices. Because a mortgage ften a company's largest debt, mortgage lenders perform due diligence before lending. For ple, a mortgage lender will verify income statement and balance sheet information and run searches to ensure that there are no prior claims on the property. nbank private financing Companies occasionally borrow from nonbank private ers, usually when they have been turned down for a loan from a traditional bank. Private ers might fund higher risk ventures because they have a better understanding of the busi- - or a particular market segment. In addition to providing funds, some private lenders will ively structure loan repayment and sometimes act as an ongoing management consultant me borrower. RESEARCH INSIGHT Nonbank Private Debt esearchers David Denis and Vassil Mihov study companies' choices among public debt, bank debt, - d private nonbank debt. They report that public borrowers are more profitable and have higher asset mover. However, the main determinant of a company's choice is its credit rating. Those with the . hest credit quality issue public debt, those with medium credit quality borrow privately from banks, and those with the lowest credit quality (have not established a strong credit reputation) borrow from nonbank private lenders. (Source: Choice Among BankDebt, Non-Bank PrivateDebt and Public Debt: Evidence From VewCorporate Borrowings, )
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