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| Credit Topics
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Line of CreditOne of the things that most credit departments do to manage their receivables is to assign a line of credit to each customer. The line of credit is the amount of money that the creditor will allow the debtor to purchase and owe under normal conditions. Therefore if a creditor assigns a line of credit of $10,000 to a debtor customer, it means that "under normal conditions" the debtor will be allowed to purchase and accumulate an amount owing of $10,000. Each creditor will have their own definition for the term "under normal conditions"; but for most, it will simply mean that if the debtor places their order in the normal way and their balance owing is current, then they can purchase and accumulate additional debt. For most, a line of credit is considered as merely a guideline, not a fixed amount that the debtor cannot go beyond. However, the reality is that credit programs will use the line of credit amount in the order approval process. If the debtor purchases an amount that will bring their balance owing over the line of credit, the order may be temporarily halted until the Credit Manager reviews the account and approves the order. Lines of Credit will be established when a new account is opened and generally must be reviewed after a specific period of time or after the account has set off some type of alarm such as being past due or over limit. Why Is It Necessary? The simple fact is that not all debtors can manage their businesses properly and cannot pay their bills when they are due. Most want to be responsible debtors, but unfortunately, some end up going bankrupt or closing their doors. Some are worse. Some knowingly commit fraudulent acts in order to enrich themselves at the expense of others. One of the responsibilities of the Credit Department is to make the wisest possible investment in A/R. In order to do that, it is important to review each creditor to insure their creditworthiness and ability to pay. During this process, a line of credit should be established. How To Determine A Line Of Credit Before a line can be assigned to a customer, there are several processes that must take place. These include the following: 1. What
is the company philosophy toward sales and credit?
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