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Personal Credit for Commercial Loan

Personal Credit for Commercial Loan

Personal credit for commercial loan is generally more important in obtaining a loan when the size of the company is small and/or the owner(s) make most, if not all, significant business decisions. This is due to the potential for an individual’s approach to business to mirror how they conduct their personal financial affairs.

In addition, the personal credit history of the ownership of companies with less than $25 million in annual sales will be more important that that of the ownership of a larger firm.

Access our Personal Financial Statement template to start working on your personal credit. personal credit for commercial loan

personal credit for commercial loan

See Also:
5 Cs of Credit
What are the 7 Cs of banking
Line of Credit
Credit Rating Agencies
Improve Your Credit Score

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Improve Your Credit Score

See Also:
5 Cs of Credit
What are the 7 Cs of banking
Line of Credit
Credit Rating Agencies
How Important is Personal Credit in Negotiating a Commercial Loan?
Dilemma of Financing a Start Up Company

Improve Your Credit Score

In another article, I told you about Chris’ dilemma with his poor credit score in trying to get traditional bank financing. Had some inquiries from that article asking what a credit score is and what steps can be taken to improve a credit score. This may not seem related to cash flow, but if you can not borrow money for your business because of your personal credit, then your business will not survive.

This once secret process of credit scoring is now made available to us and that makes it easier to improve your credit. For those of you that have not been exposed to credit scores, they are three digit numbers that are used by lenders when evaluating your creditworthiness. Other companies, such as, insurance companies, employers, and landlords use these scores in evaluating credit applications.

Credit Scoring

There are three credit scoring companies: Equifax, Experian, and TransUnion. The information reported to them by your creditors goes into the calculation of your score. The scores these companies provide to interested parties range from 300 to 850. Understand, the higher the score the better credit risk you are. To give you an idea how Americans rate, only about 11% rank above 800; 29% rank between 750 and 799; 44% rank between 620 and 749; and 16% rank below 620. Below 620 indicates you have a serious, negative credit history, and obtaining financing with reasonable terms will be difficult.

Now that you have decided to review and or improve your credit score, how do you do that? The first step is to obtain your credit reports from the three credit bureaus. One way to obtain these reports is to purchase them from www.myfico.com. When you receive your reports, instruct the bureaus to remove any incorrect information. Once you correct the information, start the process of improving your score.

3 Ways to Improve Your Credit Score:

1. You should pay your bills on time. Payment history is the most important factor in determining your credit score. This accounts for 35% of your total score. Even just making those minimum payments will maximize this area. Understand delinquent payments will destroy your credit score. Missing just one payment can cost you up to 100 points.

2. You should pay down your debts and charge less. Lenders consider and like to see a large difference between the amounts of debt reported on your credit cards and your total credit limits. The larger the gap between these numbers the higher your credit score.

3. You should not close old, paid off accounts. Based upon the calculation of your credit score, closing accounts can never help your score, but often times it will hurt your score.

I know that dealing with your credit score is not something you are looking forward to. However, if you need to improve your cash flow, you must improve your credit scores. Access our Personal Financial Statement template to get started on seeing credit score improvement opportunities.

improve your credit score, credit scoring

improve your credit score, credit scoring

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Electronic Funds Transfer (EFT)

See Also:
Electronic Data Interchange
Technology Assessment Criteria
How to evaluate IT systems
How Redundant is Your Data Communications Link?
Research and Development

Electronic Funds Transfer (EFT) Definition

Electronic funds transfer (EFT) refers to an electronic financial transaction. According to the U.S. Electronic Fund Transfer Act, an EFT is a non-paper financial transaction initiated via computer, or another electronic terminal, that gives a financial institution authorization to debit or credit an account. And EFT may also be called a wire transfer.

Electronic funds transfer transactions are quicker and more efficient than paper-based funds transfers. They can also eliminate paperwork and needless administrative efforts. Examples of common electronic funds transfer transactions include the following:

EFTPOS Meaning

The EFTPOS acronym stands for electronic funds transfer point of sale. This refers to electronic funds transfers made at point of sale terminals in retail outlets. When the customer uses his or her debit, credit, or charge card at the check out counter, the customer can opt to take out cash using the card. Furthermore, this type of EFT is common in Australia and New Zealand.

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Credit Sales

See Also:
Trade Credit
5 Cs of Credit
Collateralized Debt Obligations
Cash Flow Statement
Balance Sheet

Credit Sales Definition

In accounting, credit sales refer to sales that involve extending credit to the customer. The customer takes the product now and agrees to pay for it later. Credit sales are a type of trade credit. They create receivables, or moneys owed to the company from customers.

Credit sales terms often require payment within one month of the invoice date, but may also be for longer periods. Many companies offer discounts for early payment of receivables. For many companies, all of their sales are credit sales. Most of the commercial transactions between businesses involve trade credit. Trade credit facilitates business to business transactions and is a vital component of any commercial industry.

Sales made on credit are essentially like offering an interest-free loan to the customer. It represents a cost to the seller and motivates the seller to collect receivables quickly.


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Credit Sales and Average Collection Period

The average length of time it takes a company to collect payment for credit sales from customers is called the average collection period. A shorter collection period shows a company that is able to collect its receivables quicker. In addition, it shows they reduced the implied cost or opportunity cost of the interest-free loan to the customer.

On the other hand, a company that has a comparatively long average collection period is clearly having trouble collecting payments from customers and this could be a sign of inefficient operations.

Credit Sales Example

For example, if a widget company sells its widgets to a customer on credit and that customer agrees to pay in a month, then the widget company is essentially extending an interest-free loan to the customer equal to the amount of the cost of the purchase.

As long as the customer puts off paying for the purchase, the widget company is paying interest on loans that are tied up in the accounts receivable account due to the sale that was made on credit. In this sense, the widget company is paying interest on the customer’s loan.

The widget maker would be better off trying to get the customer to pay as soon as possible. To do so, the widget company may offer a discount to the purchase price for early payment. For example, the widget company may offer its customers a deal like 2% ten, net thirty. This deal states that the customer gets a 2% discount if they pay within ten days, otherwise they pay the full amount in thirty days. The 2% discount, when calculated out as yearly savings, turns out to be quite a substantial discount and a powerful incentive for the customer to pay early.

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Credit Memorandum Definition

See Also:
Debit Memorandum (memo)
Credit Sales
Account Reconciliation
Chart of Accounts (COA)
Transaction Exposure
General Ledger Reconciliation and Analysis
Debt Compliance 101: Keeping Your Banker Happy

Credit Memorandum Definition

The credit memorandum definition or memo is a form or document, sometimes called a credit memo invoice, that informs a buyer that the seller will be decreasing or crediting the amount that the buyer owes in accounts payable, thus decreasing the amount of accounts receivable in the seller’s account.

Credit Memorandum Meaning

A credit memo is often issued when a seller has made some sort of mistake, or extenuating circumstances have been brought to light which require an adjustment towards a sale. Credit memos from a bank are usually in regard that a bank if reversing some sort of transaction in which the bank made a payment it should not have, or the bank may have made a collection upon a note receivable or a certificate of deposit. When the latter occurs the bank will transfer the collection of funds into the depositor’s account.

Credit Memorandum Example

For example, Cindy works for Fluffy Stuffs Inc. as a part of its sales staff. The company has recently sent an order to Toys N’ More for a price based upon last month’s prices. Cindy just received the new prices the sales staff is supposed to charge customers. These prices are much lower than the past due to a drop in the market price for stuffing. Therefore Cindy sends a credit memo form to Toys N’ More informing them that they should reduce the amount that they owe to Fluffy Stuffs. Fluffy Stuffs will also reduce its accounts receivable by the same amount.

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Below the Line

See Also:
Accounting Income vs. Economic Income
Tax Efficiency
Payroll Accounting
Accrual Based Accounting
Realizing Profit Potential
General Ledger Reconciliation and Analysis
Customer Profitability

Below the Line Definition

The below the line definition is income or expense in accounting which have no noticeable effect on company profits in the current period; however, it is an unofficial term. This term is used by people in-the-know who deal with above and below the line items and account for expenses regularly. They know where to place each in credit and debit fields of accounts.

Below the Line Explanation

Below the line explained, as an industry term, expenses which are not accounted for. These extraordinary expenses, perhaps relevant to another accounting period, are not important in this period. So, leave them out or put them below the line. You may include them in later statements.

Extraordinary expenses are those which are not related to the normal business operations of a company. these are excluded because they are one time and do not relate, overall, to company finances. An example of an extraordinary expense includes the sale of a warehousing plant for a manufacturer. Though these expenses or incomes should still be accounted for they should not be included in company financials. Rather, they should be added to income after company financials when regular operations are completed.

Accountants are the experts in what lies below the line or above the line. One should consult a trained accountant before passing judgement on this matter as it may have great consequences. Below the line accounting is more serious than it may appear.

(NOTE: Want the Pricing for Profit Inspection Guide? It walks you through a step-by-step process to maximize your profits on each sale. Get it here!)

Below the Line Example

For example, Ken is the CEO of a company that sells electronic parts to wholesale clients. His business started as a function of the company he was then working in. It has grown quite successfully.

In this period, however, the recession damaged his business. Ken is worried that his investors will see this as a sign of weakness rather than a temporary issue.

Ken considers including the sale of one of his distribution warehouses in his company financials. This creates the appearance of sound income. Ken knows that this income is part of the below the line deductions list but feels that it will not matter in the long run.

After debating the issue for a while Ken decides not to include the income. It belongs on the below the line income statement. Ken knows he will come under the scrutiny of his investors but wants to remain honest. Though he may not feel the most comfortable with this, he can receive honest assistance from company stakeholders this way. Ken, ultimately, realizes that honesty is the best policy.

Download the free Pricing For Profit Inspection Guide. This ultimate guide allows you to easily discover whether you have a pricing problem and gives you steps to fix it.

below the line

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Allowance for Uncollectible Accounts Explained

See also:
Does Your Management Team Understand the Financials?
General Ledger Reconciliation and Analysis
Allowance for Uncollectible Accounts

Allowance for Uncollectible Accounts Explained

When companies sell products to customers on credit, the customer receives the product and agrees to pay later. The customer’s obligation to pay later is recorded in accounts receivable on the balance sheet of the selling company. However, sometimes customers simply don’t pay their bills. When customers don’t pay their bills, the selling company has to write-off the amount as bad debt or uncollectible accounts.

In anticipation of the fact that some customer’s will not pay their bills, a company will create an account on the balance sheet called allowance for uncollectible accounts. You can also call this allowance for doubtful accounts. This account is a contra asset account the value of which is subtracted from the value of the accounts receivable account on the balance sheet. Companies must estimate the amount of uncollectible accounts based on historic data. Then companies must apply a certain percentage of accounts receivable to the uncollectible accounts account using the percentage rate determined by analyzing the historical data.

Direct Charge-Off Method: Meaning

One way to record the affects of uncollectible accounts is the direct charge-off method. This method is simple. But it violates the matching principle and does not conform to GAAP standards and procedures. Thus, it cannot be used to record the write-offs of uncollectible accounts in financial statements prepared for the public in accordance with FASB and GAAP regulations.

In the direct charge-off method, once the company determines that a certain amount due to the company will not be collected at all, the company writes it off in that fiscal period. In other words, the company writes off the bad debt expense once it realizes the bill will not be paid. The amount of bad debt is then subtracted from accounts receivable and added to bad debt expense or uncollectible accounts expense. This is the simplest way to record uncollectible accounts or bad debt.

Allowance Method

Another way to record bad debt expense or uncollectible accounts in the financial statements is by using the allowance method. This method adheres to the matching principle and the procedural standards of GAAP.

In the allowance method, a company estimates the amount of uncollectible accounts it will incur as a percentage of credit sales. Then they apply that percentage to credit sales as they earn the revenues. The allowance for doubtful accounts matches with the revenues. Even though this method uses estimation – as opposed to the direct method which writes off bad debt when the actual amount is known – the estimates may not always be entirely accurate. However, this method adheres to the matching principle. Therefore, it is the method approved by GAAP.

For more ways to add value to your company, download your free A/R Checklist. See how simple changes in your A/R process can free up a significant amount of cash.

allowance for uncollectible accounts explained

Strategic CFO Lab Member Extra

Access your Cash Flow Tune-Up Tool Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.

Click here to access your Execution Plan. Not a Lab Member?

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