What Is a Running Account Agreement

If you are running a business or planning to start one, you may have heard about a running account agreement. But what exactly is it, and why is it important for your business? In this article, we will dive deeper into the topic to help you understand the concept of a running account agreement.

A running account agreement is a type of credit agreement between a business and its supplier. Under this agreement, the supplier agrees to provide goods or services to the business on a continuous basis, and the business agrees to pay for the goods or services at regular intervals, usually at the end of a certain period, such as a month.

The key feature of a running account agreement is that it is flexible and allows the business to purchase goods or services as needed, without having to negotiate a new agreement every time. This can be particularly useful for businesses that have fluctuating demand for goods or services, such as those in the retail or hospitality industries.

Under a running account agreement, the supplier usually sets a credit limit for the business, which is the maximum amount the business can owe at any given time. The business can then purchase goods or services up to that limit, and the supplier will send invoices at regular intervals for the purchases made during that period.

One important aspect of a running account agreement is the interest charged on outstanding balances. While some suppliers may offer interest-free credit, others may charge interest on any outstanding balances. It is essential for businesses to understand the terms of the agreement and the interest rates charged so that they can plan their cash flow accordingly.

Another advantage of a running account agreement is that it can help businesses build a good credit history with their suppliers. By making regular payments and sticking to the terms of the agreement, businesses can establish a good relationship with their suppliers and may be able to negotiate better terms in the future.

In conclusion, a running account agreement is an important credit facility for many businesses, particularly those with fluctuating demand for goods or services. It provides flexibility and convenience, allowing businesses to purchase goods or services as needed without having to negotiate new agreements every time. As with any credit facility, it is important for businesses to understand the terms of the agreement and plan their cash flow accordingly to avoid any issues or penalties.