Features of a credit limit
A payment account is the basis of a company’s cash management. If needed, an overdraft facility that suits your company’s needs can be added to it. The overdraft facility may be used up to the agreed credit limit,
and it is an opportune means of preparing for seasonal variations or unexpected expenses. For instance, if your company’s business is slow during the summer months, the overdraft facility may help in levelling off the seasonal variations. It could also come in handy if you're faced with unexpected expenditure because of a breakdown in your manufacturing equipment.
The credit limit principles are simple. Once you have agreed on the credit limit, interest rates and other terms and conditions with the bank, you can use the credit for your company’s needs up to the ceiling of the limit.
After using some of the credit, you can use the difference between the credit limit agreed on and the credit spent. When your customers make payments to your account, the credit amount spent will decrease. For example, if the credit limit is EUR 10,000 and you spend EUR 3,000 of the credit, you still have EUR 7,000 available.
All payments made to the account will automatically reduce the amount of credit spent so that the repaid amount will be available to you later. If we take the above example further,let's assume a payment of EUR 5,000 is credited to your account. This payment will be used to pay the EUR 3,000 of credit spent, after which the credit will be again available to you in full.
The credit limit pricing is simple, as it is composed of the following two elements:
- credit interest determined according to the limit used, and
- limit interest, charged on the entire amount of the overdraft facility.
Let's go back to the example above for a while. When you have withdrawn EUR 3,000 from the limit, the credit interest will be calculated on the basis of this amount up to the date on which you either repay the credit or withdraw more credit. Limit interest is charged on the entire limit regardless of how large a share your company has used of the credit.