Credit Policies: What Are They And How Do They Work?

Credit policies , a way of obtaining financing for non-current liabilities, are widely used in the business world, but care must be taken when managing them. Its operation is different from that of a credit , so it is important to be clear about how credit policies work before requesting one, to avoid finding yourself in a complicated situation.

What Are Credit Policies?

Credit policies are a credit instrument, granted by a bank, used by companies. The bank gives the company the temporary right to have debt up to a certain limit. The policyholder only pays interest for the amounts available to him , and not for the total credit granted.

Even so, some financial entities charge a commission for undrawn amounts, so this is the first aspect to take into account when obtaining a credit policy.

Formalization Of A Credit Policy

Credit policies are usually formalized in front of a notary. And it is at that moment when all the information regarding the policy is indicated:

  • Details of the concessionary financial institution and the beneficiary company.
  • The amount granted : maximum amount that the financial institution makes available to the company.
  • Deadlines . Expiration date of the credit policy. When this date arrives, a renewal study will be carried out or it will be renewed automatically without going through the notary, according to the agreement.
  • Commissions and interests . Commissions and interest rates that apply to award the amount:
  • Opening. Commission for opening the credit policy. It varies according to the issuing entity, but it applies because it is a variable loan.
  • Drawn Balance. Commission that is applied when the beneficiary company makes a refund in the account.
  • No Availability. A commission can be applied for the undrawn balance, if the company has not needed to use all the amount that has been granted.
  • Interest For Exceeded. If the beneficiary company exceeds the limit granted by the financial institution. These interests will be much higher than the commission for the drawn balance.

How Does It Work And When Is A Credit Policy Necessary?

Credit policies are necessary, for example, when a company makes a sale that is not going to collect for a considerable time, but has to cover taxes, plus VAT during this period. That is, you need an injection of money until the moment you receive the amount of the sale.

In these cases, the company will use the policy as a self-service: if it is served little, it may not cover all your financial needs. If you go over and borrow too much money, you will end up wasting resources.

How Do Credit Policies Work?

  • Checking account : credit policies have an associated checking account , so it is used as such. Its use is usually short-term, between 6 months and 2 years, although it can be automatically extended.
  • Interest : interest on credit policies is paid quarterly, and the interest agreed upon at the firm is applied to the average debit balance for the period elapsed. Although this may vary depending on the negotiated conditions.
  • Renewal : the renewal of a credit policy depends on the financial institution , which is not obliged to do so. Given that this can be a death sentence for the company, for a short time the entity has been obliged to notify in writing 3 months in advance if it intends not to extend the policy, or to reduce the amount by an equal or higher percentage to 35%.
  • Costs : the costs for the company that takes out a credit policy are considerable. That is why it is necessary to be very clear if it is necessary to contract this type of financial operation.

Now that you know what credit policies are and how they work , you can decide if it is a suitable product for your business at the moment, or if it is rather an option to consider in the future.