What are Open Account Terms?
Open account terms are types of debt where there is no fixed payment that is required for a fixed term. It is a type of debt where a credit line is provided to a debtor who will make use of it through multiple transactions which generally would create more credit to the buyer as the outstanding balance is paid.
A good example of an open account is a credit card or a home equity line of credit. In both types of debt, the credit holder is allowed to make multiple transactions charged to the credit line at a certain credit limit. Payment is done that varies every period but usually supported by a minimum amount due on a recurring basis.
When an Open Account term is offered to a debtor, Screening and proper review of the debtor’s risk profile is very critical. This is to ensure that credit line offered to the debtor will be sufficient that will allow him to pay for the credit used. Two actions must be present to ensure that a creditor is providing proper credit to a debtor.
- Internal Control – internal controls must be in process to ensure that any application for a credit line goes through an effective process to check and control risk. Proper internal controls will greatly help risk management. Without policies and procedures to be followed on granting credit, this may prove to cause approval of high risk clients. This may bring in losses due to unpaid loans.
- Extend of Investigation – the investigations that are conducted needs to be enough to learn about the client but not too much that would cause the process of reviewing and approving credit to be time consuming which may affect and limit a licensed money lender’s capacity to approve personal loan singapore. The time and expenses directly linked to a credit investigation will also contribute to the costs of approving credit to a debtor.
Open account terms may prove to be beneficial to a debtor as it provides flexibility of doing repeated multiple transactions without having the worry of exhausting the money. As long as the debtor continues to clear a portion of the credit line, there will always be room for a purchase of goods or services.