AccountingBusiness Guidelines

Credit Policies – Everything you Need to Know

Financing is one of the most important concerns that SMEs and freelancers have. A one-off lack of liquidity can put them in trouble when it comes to meeting their payment obligations, or it can cause them to miss the opportunity to make an investment that could improve their business. Therefore, it is not surprising that more and more professionals decide to put an end to this concern by taking out credit policies.

What are the Credit Policies? What is its operation?

A credit policy is a way of obtaining financing, hence it is often confused with the concept of a loan, although they are not the same. It is an instrument through which a bank makes a line of financing available to the self-employed or the company.

This means that the client has a certain amount of money at his disposal and can use it when he needs it. Then proceeding to the return of that amount in accordance with the terms agreed in the contract.

For example, if a self-employed person has a credit policy worth $ 30,000 and needs to buy a vehicle for their business worth $ 15,000, they can immediately access the money. You do not have to do all the paperwork related to obtaining financing because all this has been done before.

After this operation, the self-employed person owes the bank 15,000 dollars plus interest, and he still has another 15,000 dollars in his credit policy that he can use if necessary. Also, as you pay back the money, that amount is added back to the credit line.

That is, if the self-employed person has already returned 10,000 dollars, his credit limit then goes up to 25,000 dollars.

Advantages and disadvantages of the Credit Policies

The great advantage of this financing system is that it allows companies and professionals to predict their money needs. Once the processing is done, you can access the money at any time without giving more explanations. Hence, it is a good alternative in the business world, where it may be necessary to have liquidity practically overnight.

As with any other banking product, entities apply a series of commissions so it is the badest part. In this case, the most common is the opening commission, the disposed of balance commission, the non-availability commission (it implies that the client is charged if he does not use the money), and the commission for exceeding it.

The expenses related to the hiring of the policy must be added because you have to go through the Notary Public. All this implies that access to a credit policy can have a high cost.

Characteristics of the Credit Policy

The contracting of this product gives rise to the opening of an associated checking account in the name of the beneficiary in which the money will be available and in which it will have to make payments when it is available.

It is a form of financing in the short and medium-term since the duration of the policy is usually between six months and two years. However, contracts are usually extended automatically, although the bank may decide not to renew the product or lower the credit limit.

Content of the Credit Policies

The hiring is done in the bank, but it must be recorded by means of a public deed granted before a Notary Public. This contract will indicate the identity of all the parties and, also, the amount awarded.

Another important piece of information is the expiration date of the policy and the conditions associated with its extension. If the extension is implicit, it will not be necessary to go through the Notary again, but if it is not, a new public deed will have to be signed, which implies assuming another cost.

The contract must also clearly specify the commissions and interests to be applied.

When is it necessary to have a policy of this type?

The situations in which freelancers and companies can benefit from having this product contracted can vary greatly.

A good option is to do this if you work in a sector where there may be liquidity problems. For example, if the payment terms applied by the providers are too long and it may happen that the company has had a good level of invoicing, but does not have money available when it has to meet its payment obligations.

Also, if it is a business with a clear orientation to innovation and you need to have money always available to be able to invest it in actions that improve your competitive advantage.

Credit policies are a good financing alternative. But, given that the costs associated with them can be very high, before hiring a product of this type, make sure that there is no other cheaper option.

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Ahmed Ismail

I'm a Civil Engineer. I like reading everything related to Business so I decided to launch the "Fast Grow Company" website to help Entrepreneurs in their business journey. Keep updated and follow us.

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