Today there is still confusion between the exact meaning of a credit account with respect to other financing alternatives.
We can say that a credit account is one of the most optimal ways within the credit policies that companies and freelancers have to solve their most immediate liquidity problems, especially in regard to the currency.
What exactly is a credit account?
The purpose and characteristics of a credit account have nothing to do with those of a loan operation in which a given amount is available only once from the moment of granting. In addition, the latter are usually intended for the acquisition of a specific asset such as a car, a house, or other material goods.
On the contrary, when a credit account is opened, the company and the financial entity agree on a certain amount of money, of which provisions and impositions will be made throughout its term, which is normally six months or one year.
The mission of a credit account
The objective of this operation is to contribute to the proper functioning of the business, contributing extra liquidity to unforeseen expenses or ordinary operations.
This means resolving specific incidents of the treasury in the face of specific needs, such as those derived from sales in installments in which the payment will be received progressively, or the payment of payrolls for a given month, extraordinary repairs or any daily circumstance that may stop the usual activity of the company.
On the contrary, organizations should not use credit accounts to finance a material or furniture good such as the purchase of a vehicle, machine or business premises. For these types of operations, there are other more suitable financing alternatives.
Next, we will talk about the different types of credit accounts most used today
This is one of the most used and known credit accounts for companies that must be formalized before a notary.
The amount that the financial institution grants to each company in a line of credit, varies depending on the payment capacity of the same.
They mean a powerful tool for any organization since they are often used for common expenses such as payroll payments, suppliers, unforeseen machinery repairs … etc.
Let’s give an example …
Suppose that a company must pay the payroll of its workers on the 30th. It had to do so with the income obtained from the collection of a pending invoice and receive the news that this income will be delayed until day 6.
In a situation like this, if the company has a line of credit, it will be able to carry out its operations normally, having the necessary money to make its payments. Subsequently, once they receive the pending liquidity, they will enter it on the credit line to regularize the available one.
When the time of the credit line comes to an end, it must be covered in its entirety, either with the company’s own funds or with the tacit renewal by the financial entity. It involves a series of expenses and commissions set in the policy.
In general, a line of credit is used to start or develop businesses in which liquidity flows vary
Revolving or revolving credit is a credit operation that does not have a number of pre-set installments in its concession. The clearest example is the well-known credit cards that financial institutions grant both to individuals and companies, without the need to be signed before a notary.
The bank makes available to the user a certain amount of money for which he will not have to pay anything if he does not have it. But as soon as the first euro is used, interest will start depending on the amount used.
The rationale for these credits is usually focused on dealing with unforeseen expenses or payments. The main advantages of revolving credit:
- Only fees are paid for what is used
- Quick availability of money
- Credit reuse without the need for new processing
- This money can be used virtually for online purchases
Credit Account & Debit Account
The debit account is what is commonly known as a checking or savings account, in which all entries made of both income and expenses are directly against or in favor of the balance available at that time, (as opposed to credit account).
As soon as this account runs out of balance, operations will cease (although some banks allow you to load overdrafts based on the creditworthiness of the client).
With a debit card, we can only make payments and charges as long as our account has a balance to meet them.
With a credit card, we can make charges and purchases regardless of the balance of our account, as long as we do not exceed the established limit.
In general, credit accounts are very useful for:
- Avoid defaults and overdraft charges for a lack of immediate liquidity.
- Attend provider payments
- Unforeseen expenses as urgent repairs.
- Offers limited in time
- Deal with any ordinary working capital expenses.
The behavior and attitude of the client with respect to their credit accounts will be essential for the financial entity to maintain the continuity of the operation over time.