What Is Provisional Credit?

What Is Provisional Credit?

Provisional credit is a temporary credit that financial institutions issue into people’s accounts. In most cases, you get provisional credit if there is some dispute associated with your transaction or if there hasn’t been any verification of a transaction yet. There are many benefits associated with it, especially for retailers who witness occasional highs and lows in their business.

When there is temporary credit issued in your account, it reflects the amount in your safe at your store location. This means that you get access to money even before the funds from your store are physically transported to get deposited into your accounts.

What situation could benefit from provisional credit?

Several situations that require a physical transaction of money into a supplier’s account can benefit from this type of credit. For example, let’s consider you have a business that requires a high amount of payment to get supplies but is also subject to peaks and valleys over time, you may benefit from provisional credit.

If you’re wondering how, this is because even though you have enough funds in your safe to pay for whatever you owe, it may not come in handy when a supplier requests for an online transfer to create an invoice.

This means that there must be some amount in your account that you can have access to if a supplier like this comes your way. Again, this is not the only situation that benefits from a temporary credit issuance.

Additional benefits

Here are some additional benefits to provisional credit:

Quick access to cash

If you use the traditional deposit method in financial institutions such as a bank, it means sending a trusted member of your staff to make a deposit manually. In other words, you will not only risk having insufficient staff at the store, but will also get the deposited fund after many days. Through daily issued provisional credit into your account, you can save an entire day of downtime.

It also transforms the way your store usually operates because you can perform money-related tasks, such as paying employees, paying invoices, and purchasing inventory without any delay.

More visibility

By availing services from a reliable provider, you can have access to daily credit along with a smart, safe solution. This way, you will get better visibility across your business and log on to an online portal to check the available funds 24/7.

Better management

With provisional credit issued into your account and easy monitoring of funds in your safe, you can save some valuable time to focus on other crucial tasks. Moreover, retailers are also able to get an insight into their performance across multiple store locations.

Better use of resources

Taking multiple trips to the bank is a labor-intensive process and also a hassle when it comes to handling cash. Due to sudden off-site bank runs now and then, your store operations could greatly suffer.

As a retailer, you must note that your store managers are the number one asset to your business, and their absence could create havoc in your stores. Therefore, you should also work with a cash-handling company so it can partner up with your bank to make the process of receiving provisional credit smooth.

Many banks in different countries are now considering the option of provisional credit to provide retailers with better cash liquidity and insights into their performance at the same time.

What is an overdraft fee?

overdraft fee

An overdraft fee refers to the amount charged by credit unions and banks when it covers a certain withdrawal or payment you’ve made that goes beyond the available amount in your checking account.

This fee is in place due to the overdraft protection policy that prevents you from the embarrassment of writing bounced checks or missing payments since you’ve spent more than what you had in your bank account. Therefore, financial institutions charge you this fee in exchange for covering the over-payment.

By having provisional credit in your account, you can avoid spending more than what you have. As a result, you can avoid coming across this fee.

Does it hurt your credit?

The short answer is no; it does not affect your credit rating or your credit report. However, if financial institutions turn over your negative balance or unpaid fee to a collection agency, it will appear on your credit report. The outcome of this is that you will not be able to open credit card accounts or borrow money.

Can you open a new account with overdrafts in your record?

Moreover, your ChexSystems report (a check verification service that summarizes your bank account opening and maintenance history) also records your overdrafts. Since credit unions and banks use this report to decide whether or not to take you as a new customer, it can put you in a difficult position.

Even though having a few overdrafts in your report should not be a huge concern, it is recommended that you pay your dues immediately. In case you haven’t paid the fee or have negative balance at any credit union or bank you’ve had business with in the past, you will have to clear your ChexSystems report otherwise no new institution will let you open an account.

How can you avoid overdraft fees?

This goes without saying, but the most effective way to avoid this fee is by making sure you maintain your account balance in a way that it covers your expenses, including uncleared checks. However, if you still end up spending more than what you have, you can consider the following options to avoid overdraft fees.

Drop out of overdraft protection

While you have the option of opting out of this type of policy, it may not necessarily save you any money. This is because when you transfer funds in an amount more than what you have in your account, your credit union or bank will not accept the transaction. In fact, they will also charge you a fee for not having sufficient funds in your account.

Furthermore, you may also have to face a penalty or claim filed by the recipient of your declined payment. To add more, your credit score could see some serious decline if you’re not able to pay your dues in time.

However, there’s also another way of opting out of it without fees or penalties. You can choose to opt out of protection but on your ATM withdrawals and debit card payments. This way, whenever you have insufficient funds, your debit card transaction will be declined, saving you from the hassle of disputes and whatnot.

Connect your checking account to a savings account

By doing this, your funds will automatically get transferred from the savings account to the checking account and help you cover your overdrafts. There may be a fee charged for each transfer, but it’s lower than an overdraft fee.

Regardless, having an overdraft fee is not exactly an inconvenience. If anything, it will protect you from bigger penalties and fees. However, it doesn’t mean that you have to come across it. You can simply avoid it by keeping track of your fund status and not going overboard with expenditures.

What is cash-in-transit?

Businesses that witness a lot of cash in-flow on a daily basis often send it from one point to the other (which is usually a bank), so they can have it in their bank account. When the money has left point A but hasn’t arrived at point B, that is cash-in-transit.

Is cash transfer always manual?

In short, cash transfers are not always physical. They can also be in the form of checks that the bank is yet to clear. The reason why it can sometimes be a problem is that CiT pick-ups could result in increased operational overhead.

This also means that it can take quite a lot of days before your money is finally processed by the bank. Unfortunately, that hinders your ability to spend money on something important or pay your bills until the credit shows up in your account.

How does provisional credit overcome CiT problems?

Provisional or temporary credit ensures that there are sufficient funds in your account. Moreover, it also overcomes the problem of operational overhead by reducing your CiT pick-ups. It also gives you some visibility to figure out if your business is performing well.

It reduces the risk of fraud

Even though provisional credit is a temporary addition to your account, it eliminates many security risks linked with CiT services. By transporting cash from one point to the other, you can risk a possible instance of mishandling.

What is cash automation and how does it reduce CiT fraud?

Since we’re on the subject of mishandling cash, there are also secure CiT services to save your money from risk of theft and fraud. They are called automated cash handling services.

Automated cash handling refers to the process of counting and dispensing cash through specially designed software and hardware. It allows you to avoid loss, theft and wasting time on overseeing the cash transfer procedure. This means you will no longer have to send cash physically from one point to another when it can be sent automatically.

The downside to provisional credit

Provisional credit does bring some value to your business transactions and there is no question about its importance. However, just like everything else, it also has some drawbacks such as:

It can cause an overlap between your real and provisional credit

Sometimes, when your transaction is verified, your financial institution posts a permanent transaction to your account. There is a chance of your provisional credit not getting revoked when your permanent transaction is posted. This could create a discrepancy or an overlap where your account shows both the permanent and temporary account credit.

You can end up spending more

Even if it’s just for a short while, provisional credit does give you the illusion of having more money. There is a chance that you end up spending more than what you have.

The bottom line

As more and more countries are becoming familiar with the concept of provisional credit, there are speculations that retailers will soon be able to enjoy its perks in different countries.

At the moment, provisional credit service is available in Mexico, France, Germany, Italy, and the United States but unavailable in Spain or the United Kingdom. It’s important to understand that provisional credit does not always come in a single form. Some banks may give it to you after a day or two, while others will give you credit in real-time.