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9 Elements of Capital in the Financing and Venture Capital Businesses

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The process of granting a credit application is not a standalone process, but instead a process based on several elements. Every single banking or non-banking financial institution that provides credit loans will have to understand each element of credit.

These elements range from the intrinsic ones such as debtors and creditors to the more abstract ones such as trust. Let’s discuss further through the following review.

Essential Elements of Credit

See the explanation below to get to know the elements needed in the credit process.

1. Debtor

First, there is the debtor, who is the party making the loan or receiving the debt. The debtor is known as a borrower in financial institutions, but is referred to as an issuer if the credit is in the form of securities.

By law, in the case of bankruptcy, the debtor can choose credit repayment priority. However, if a default occurs, the agreed credit agreement has been violated and the lender can take the guarantee that was previously set, if any.

2. Creditor

Apart from debtors, there are also creditors, namely parties who provide credit such as banking and non-bank financial institutions. The creditor acts as a debtor or creditor. They provide credit to individuals and business entities that need funding.

Some lenders also prepare credit reserves in case of problems in the middle of the credit process. The goal is that the debtor does not fail in payment.

3. Duration

Each credit agreement has a term or period for repaying credit or loans. Usually, credit payments are repaid in installments which are made every month on the date specified in the agreement.

Both the creditor and the debtor agree on a repayment period in accordance with the ability of the debtor.

Read also: Credit Restructuring: Conditions, Types, and Examples in the Investment Sector

4. Risk

Risk in credit can occur for two reasons. First, the debtor deliberately does not pay off the installments even though he is able to do so. Second, the debtor is unable to pay due to factors beyond his control.

An example is when a debtor is affected by a disaster which results in limited ability to repay credit.

This potential risk is strongly influenced by the payback period. The longer the payback period, the greater the risk of default. Conversely, if the payback period is short, the risks faced by creditors and debtors are also lower.

5. Remuneration

Remuneration is the advantage that the creditor gets from the credit given. Remuneration is used as income from the provision of these credits.

Conventional banking institutions, for example, generate remuneration in the form of interest and administration fees charged to customers as additional income. Whereas in Islamic banking, this remuneration is referred to as profit sharing, in accordance with Islamic finance principles.

6. Collateral

Collateral is a credit element in the form of goods with a value that exceeds the amount lent. For example, if the debtor borrows IDR 15,000,000, then the guarantee provided must have a higher value, such as a motor vehicle.

Collateral functions as collateral if there is a problem with credit payments. Automatically, the assets used as collateral will be taken over by the lender.

However, banking institutions also provide collateral-free credit options even though the risks involved are higher.

Read also: Credit Risk and Its Importance in Property Business

7. Worthiness

Worthiness is a measure of a debtor’s ability to repay his credit. Worthiness is seen through the amount of income owned. The greater and more stable the creditor’s income, the lower the risk of default.

Debtor worthiness can also be seen from the debt history. Before providing a loan, financial institutions conduct a survey to assess the eligibility of prospective borrowers.

This survey is used to view past debt history, how to repay installments, and so on.

8. Agreement

The agreement is an element of credit embodied in the form of a business contract. This contract is an agreement signed by both parties. The contents of the agreement include the rights and obligations of the credit giver and recipient.

In addition, this agreement includes the loan amount, repayment period, and conditions in case of late payments. For example, the amount of fines, administrative costs, and taking guarantees after the credit is paid off.

All credit agreements must be clearly written and accompanied by a stamp as a sign of the validity of the document. Without an agreement between the two parties, credit cannot run smoothly.

9. Trust

The last but not least important element of credit is trust. Why? The term credit itself comes from the Greek, namely ‘credere’ which means trust.

The principle of trust reflects the confidence given by creditors to debtors in providing loans, whether in the form of money, services, goods or other credit objects.

Read also: Know Your Customer (KYC): How Does it Work and How Can it Help Your Company

Functions of Credit for Financing and Banking

Credit has three functions for financial institutions. What are they? Here is an explanation.

1. Assisting in Fulfilling Customer Needs

This function is carried out in fulfilling the role of financial institutions towards customers. They assist customers in meeting their needs through the credit services provided.

Customers obtain funds according to their needs, ranging from business capital, loans for housing needs through mortgages, to loans for purchasing various types of goods and property.

2. As a Source of Profit

Financial institutions also generate profits through the credit process they run. They provide credit services and reserve the right to determine the desired interest rate.

Interest rates on loans can be fixed or change over time.

Generally, if the customer is unable to pay off the installments according to the specified time limit, the financial institution may impose late fees.

Revenue from these fines is used to fund the operations of financial institutions while increasing profits.

Read also: 2 KYC Examples in Banking and Finance Industry

3. Advancing the Country’s Economy

Indirectly, financial institutions also have a role for the country’s economy. Through financial institutions, the funds needed by the community can be channeled to strengthen the economy, especially loans for business capital.

In this case, the more funds channeled through credit, the economic growth of a country will increase.

Have you understood the crucial credit elements in the fund borrowing process after reading this article? In essence, credit does not only involve debtors, creditors, and funds lent, but also invisible or non-intrinsic elements such as trust and creditworthiness.

Read also: Liveness Detection: How Does it Work and Its Importance for Digital Security

Validate Your Debtor Data with eendigo

So that each of the credit elements mentioned above can be fulfilled in your financial institution, use the eendigo User Validation. This product is API-based which can be easily integrated with the services you provide.

No need to worry because this product is equipped with a machine learning algorithm that can avoid attempts to fake faces and can help assess a customer’s credit risk level.

You can also do the digitization of loan origination process in your financing company by using the reliable Credit Scoring service from AdIns. This service is also based on machine learning so that it can save potential customers and you time in assessing their credit worthiness.

Interested in using both of these services? Contact us to try the free trial version of eendigo User Validation or the Credit Scoring service from AdIns right now!