About Finance Terms
ACCESS
Contact your financial institution to set up finance terms for your business and your customers.
Finance terms are optional. If you elect to make a customer's balance subject to finance charges, you must assign a finance term, which determines how finance charges are assessed. Your business can have an unlimited number of terms to assign to customers.
Examples
Terms are displayed in abbreviated format, as shown in these examples:
| Example Finance Term Format | Tiered? | Details |
|---|---|---|
|
18% ABM 0d $0.00 |
No |
APR = 18% Method = Adjusted Balance Method Grace Period = 0 days Minimum finance charge = $0 |
|
18% ADBM $500 12%20d $25.00 |
Yes |
APR = 18% Method = Avg. Daily Balance Method Tiered Limit = $500 Tiered APR = 12% Grace Period = 20 days Minimum finance charge = $25.00 |
Comparing calculation methods
You should discuss with your financial institution which calculation method is better for your business. You can have multiple terms with either calculation method.
TIP
From Transaction Details for a finance charge, click the Calculation button to view how the finance charge is calculated.
| Attribute | Method | |
|---|---|---|
| Adjusted Balance Method (ABM) | Average Daily Balance Method (ADBM) | |
|
Description |
Typically used for commercial customers; assesses a finance charge to the customer's eligible financed balance on the billing date (end of day). This method is usually preferred because it is simpler and easier for customers to understand. This method does not take into account when payments are made, and late payers may get a break as long as they pay by the next bill date. Only the portion of the customer's financed balance that remains beyond the due date and the grace period is used to calculate the finance charge. |
Typically used for retail customers; uses the average balance across the entire billing period. This method works like a credit card (except that current purchases are excluded), and the number of days in the billing period can be important. |
|
Balance Subject to Finance Charge |
Eligible Financed Balance* minus Unapplied Credits on the last day of the billing period * Eligible Financed Balance is the sum of the customer's open invoices and debit memos that are aged beyond the grace period. |
The sum of the Daily Eligible Financed Balance* minus Daily Unapplied Credits (for each day in the billing period) divided by the number of days in the billing period |
|
Calculation |
From the end-of-day balance at the bill date, subtract any unpaid finance charges, payments and credits received in the billing period, and then multiply by the finance charge rate. |
Take the sum of ending balances of financed transactions every day (excluding current period purchases) and divide by the number of days in the billing period to get an average daily balance. Because payments and credits received during the billing period are subtracted from the balance when they are posted, payment dates can affect this calculation. |
|
Example |
Rate = 10% Grace Period = 20 days Min. Charge = $5.00 Method = ABM Tiered Limit = $1,500.00 Tiered Rate = 7% Eligible financed balance = $1,374.61 Finance charge = $11.67 |
Rate = 18% Grace Period = 10 days Min. Charge = $10.00 Method = ADBM Tiered Limit = $0 Tiered Rate = 0% Eligible financed balance = $10,232.82 Days in billing period = 31 Avg. daily balance = $330.09 Finance charge = $5.05* *In this case, the actual finance charge is $10.00 because the calculated charge is less than the $10 minimum charge. |
Tiered finance charges (optional)
You can set up a tiered finance charge as a secondary percentage rate to take effect when a customer's balance exceeds a specified amount (tiered limit). The customer's balance equal to or less than the Tiered Limit is subject to the primary APR, while the balance that exceeds the Tiered Limit is subject to the Tiered APR. Why use tiered rates? A retail business may choose to encourage additional sales by offering a lower rate for higher balances.
Are finance charges included in past due balances?
Finance charges are included in the Total A/R Past Due Balance. However, they are NOT included in the Funded Past Due Balance because finance charges are not funded transactions.
For customers with Fixed or Revolving payment terms, the Funded Past Due Balance is N/A because the terms affect the entire customer’s account rather than individual invoices.
Regulation Z
Regulation Z (Truth in Lending) is a federal law requiring lenders to disclose in writing certain information to their customers. Laws that govern finance charges vary by state, including maximum percentage rates and how rates are calculated, disclosure requirements, creditor responsibilities, customer billing rights, etc. Contact your financial institution for additional information.
