Credit: Basis of Credit, Credit sales and Deferred Payment

CONTENT

• Definition of Credit
• Basis for Credit
• Credit Sales
• Deferred Payment

CREDIT

Credit is any arrangement made with a shop, bank, trader, business organization etc. that makes it possible for money, goods or services to be obtained and payment deferred to a future date/time.

BASIS FOR CREDIT

• Personal integrity of the customer
• Level of income of the customer
• Nature and reliability of the customer’s job or business
• Personal financial commitment of the customer
• Sources of credit repayment

TYPES OF CREDIT

1. CREDIT SALES:

 This simply means the transfer of goods and services from a seller to a buyer without any payment being made immediately. The buyer takes possession of the goods with a promise to pay at a future date. Payment by the buyer could be made installmentally or all at once.

Advantages of Credit Sales to the Seller

1. Increase in sales or turnover
2. Increase in profit i.e. the seller makes more profit
3. The seller sells at a higher price
4. It reduces the risk of holding stock e.g. risk of fire, theft, obsolescence
5. It quickens the disposal of perishable and timed goods.

Disadvantages of Credit Sales to the Seller

1. The seller has more of his capital tied up in debts
2. There is risk of bad debts since not all the money owed by customers can be recovered
3. Risk of inflation/devaluation in value of money
4. The seller incurs additional expense owing to the volume of paperwork involved in keeping records and sending reminders to slow payers
5. The seller requires a bigger capital to be able to stay in business

Advantages of Credit Sales to the Buyer

• The buyer enjoys the use of the goods before he has paid for them.
• The buyer is free to dispose of the goods as he pleases (i.e. sell it) since he is the owner of the goods even though he may not have paid all the installments due.
• If the buyer defaults in his payment, the seller cannot repossess the goods.
• At times, it is a solution to necessity for people who are in short of ready cash.

Disadvantages of Credit Sales to the Buyer

1. The buyer pays more than he would have paid in cash purchase
2. There is temptation for the buyer to over purchase i.e. to buy goods beyond his means
3. The buyer has less opportunity to bargain or negotiate for better conditions of sale
4. It reduces the scope of choice of the buyers since not all sellers sell on credit.
5. The buyer may be given inferior or sub-standard products since he is not paying cash immediately

EVALUATION QUESTIONS

1. Explain three reasons why a trader may sell his goods on credit
2. State four advantages of credit sale to the seller

1.         DEFERRED PAYMENT:

This is a type of credit arrangement whereby the buyer becomes the owner of the goods by paying an initial deposit with a promise to pay the balance instalmentally

FEATURES OF DEFERRED PAYMENT

• Initial deposit
• Installment payment
• Ownership (title to the goods) is transferred to the buyer immediately the initial deposit is paid.
• It is an arrangement suitable for both consumables and durable goods.
• If the buyer defaults in the payment of his installment, the seller cannot repossess the goods, but can only sue the buyer in order to recover his remaining amounts.
• Cash discounts may be given by the seller to encourage the buyer to pay promptly.
• The seller may or may not charge interest on the balance remaining unpaid by the buyer after the initial deposit is made.
• The goods are regarded as having been sold immediately the buyer pays the initial deposit. Therefore, the buyer can dispose off the goods as he likes i.e. he can sell it or pledge it as security for a bank loan.

N.B.  Advantages/Disadvantages of Deferred Payment to Sellers and Buyers are the same as for Credit Sales

EVALUATION QUESTIONS

1. State four features of deferred payment
2. List four disadvantages of deferred payment to the buyer.

GENERAL EVALUATION/REVISION QUESTIONS

1. State five reasons why a trader may be reluctant to sell goods on credit to his customers
2. List five differences between credit sale and deferred payment
3. State five ways in which a bonded warehouse may be useful in international trade
4. State and explain the importance of any five ancillary services to trade
5. Describe five measures each which a government may take to (a) restrict imports

      (b) promote exports

READING ASSIGNMENT

Essential Commerce for SSS by O.A. Longe Page 120 – 127

WEEKEND ASSIGNMENT

1. If a customer is allowed N1000 overdraft and he receives a bank statement showing an overdraft of N100. This means that he (a) cannot draw more cheques (b) is owed N100 by the bank (c) owes the bank at least N900 (d) owes the bank N100 only
2. The granting of permission to pay at a future date for something of value received now is called (a) overdraft (b) loan (c) credit (d) installment payment
3. What is not an instrument of credit (a) bill of exchange (b) cheques (c) money order (d) source documents
4. A bank overdraft can only be granted to the holder of a (a) current account (b) deposit account (c) savings account (d) fixed deposit account
5. Short – term loan to expand a business is provided by (a) building societies (b) central bank (c) commercial bank (d) mortgage bank

THEORY

1. What is credit?                 
2. State three advantages of credit sales to the buyer