They are an alternative so that freelancers and SMEs can meet specific capital needs
You can think of credit policies like in that pocket that you have saved for emergency cases or when you need money urgently, but you do not have it. At bottom, credit policies are considered loans granted by banking entities, although there are significant differences that make them very useful financing instruments for SMEs and freelancers.
Once this is said, let us specify: a credit policy is a loan that the bank grants us and whose capital can be used whenever we need it. And there is the key because even if we hire one of these policies, we do not have to use the available capital if we do not consider it necessary.
Differences between a credit and a loan
Credit policies open a line of financing between the client and the bank. In this way, we will always have a certain amount of money to use at specific times. Therefore, when applying for one of these policies we do not receive the money that was granted to us, but we are given access to it for when we want to use it.
On the contrary, when a loan is granted, the total of the requested capital arrives directly to our account. Regardless of whether we spend that money or not, we will have to face the return of the entire capital plus its interest.
That is another key that is worth highlighting, since when we use a credit policy we only pay interest for the money we actually use, not for the total amount of the credit that has been granted to us.
For example, imagine that we will hire a credit policy with a € 20,000 stop. So, during the first months, we do not need to touch that money but an urgency forces us to withdraw € 5,000. At the time of returning the money, we will only pay interest on the € 5,000 we have withdrawn, not for the total of 20,000.
The habitual thing is that the credit policies are contracted with a year of maturity, after which the client can choose to renew it or no.
When a credit policy is useful
In the day to day business, there are times when it is necessary to resort to a capital of which, for whatever reason, is not available. This is where the credit policy comes into play in cases like, for example, the delay in paying a customer whose money we had already committed to own expenses of our own business.
It is, therefore, a solution for these treasury and current tensions that occur from time to time in any small and medium business.
However, the use of the credit policy is not recommended for fixed or periodic expenses that we can program and assume otherwise. It must be remembered that, in the end, the money that we access is a loan that involves a series of costs and interest.
Costs of the credit policy
The main costs of this form of financing come in the form of commissions. The most common are the following, although some entities may include them and others not:
- Opening commission: it is a percentage of the total of the credit that is requested and usually does not exceed 2%.
- Annual review commission: It only applies in case of renewal of the credit policy and its cost is usually the same as that of the opening commission.
- Availability Commission: it is a percentage of the money that was not used once the credit card’s interest rate has elapsed.
- Commission for outstanding balance: if we exceed the credit limit we have granted we will have to face the payment of interest.
Next, to these commissions, there is another series of expenses related to the hiring of an insurance policy; It should be clarified that, in the same way, that the commissions, these expenses depend on the banking entity with which the policy is contracted. Some examples in this sense are the commission of study or the commission for early cancellation.
We end up explaining that a credit policy is a resource greatly appreciated by many freelancers and small and medium-sized companies to solve liquidity problems that they can not wait for. Once the policy is granted, the money can be obtained immediately without the need for further processing.