Credit Facilities and how you can acess them for your business

Credit can be defined as the the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future.

Credit occurs when a seller grants permission to a buyer to take possession and enjoy a commodity with the aim or promise to pay in the future.

It is the process whereby goods and services are transferred to the buyer from the seller for his use and enjoyment without value being paid immediately.

Basis for credit sale

The following basis must be considered before granting credit. They are:

• Sources of payment
• The income of the buyer
• The integrity of the person
• Time of payment
• Present employment

Advantages of credit sales

The following are advantages of credit sale

1. It encourages bulk purchase: Credit encourages customer to buy in bulk compare to what they intend to buy at the initial time without credit facilities.
2. Enjoyment of goods without payment: Customers can possess and enjoy the value of goods without immediate payment.
3. Increase in standard of living: Credit sales can increase the living standard of people as buyers can buy goods they never thought they could afford to buy.
4. Means of meeting temporary needs for cash: Credit can serve as serve as a means of meeting temporary needs for cash because the individual can buy on credit and use the money at hand for other things.
5. It can improve a family’s level of living. For example, most people use credit to buy their homes. The main reason most people use credit is that they do not have the cash to pay the total cost of an item or service at one time. Another reason is that it may be easier to pay for an item through regular installment payments.

Disadvantages of credit sale

1. Customers can overbuy: The customers can be tempted to buy more than what they intend to buy because of credit sale.
2. Increase in Price:Buying on credit makes the seller to add additional price on the sale of good, thereby bringing about increase in the price of goods.
3. Capital can be tied down: In the process of selling on credit, the capital of the seller can be tied down in the hands of customers which can eventually bring the business to a close.
4. Problems of non payment: Some customers after buying on credit sometimes find it difficult to pay back to the seller.
5. It involves record keeping: Credit sales involves a lot of record keeping as both both sales and and cash record must be kept.
6. It can lead to court action: If the buyer refuses to pay, it can lead to court

Types of credit sales are:

1. Hire purchase: Hire purchase can be defined as the system whereby the buyer or hirer has possession and the use of the goods while the owner retains the ownership of goods until the final payment is made. It is a means of paying for goods through installment.

Features of Hire purchase

• Hire purchase attracts hire prices
• Hire purchase is good for durable goods
• It must be documented
• The cash price and the hire purchase price must be stated to avoid problem
• The seller has the right to claim the goods if the buyer refuses to pay
• The goods will continue to be under hire and will not belong to the buyer until the final installment is made

Advantages of hire purchase to the seller

• It increases the rate of turnover
• Profit will increase as price of goods increases
• It facilitates the promotion of durable goods
• It leads to large scale of production

Disadvantages of hire purchase to the seller

• It can lead to court action
• Goods repossessed becomes difficult to sell
• A lot of capital can be tied down
• Customers may fail to pay and this can lead to bad debt

2. Mortgage:This is a system of credit in which building societies or mortgage bank assist in people to buy landed property or houses by lending them a proportion of the purchase money.

Features of Mortgage

• The building or property will be used as collateral security
• Interest will be paid by the the mortgagor (the borrower)
• The lender is called the mortgagee

3. Loan and overdraft:Loan is a sum of money borrowed by individuals, firms and government from financial institutions or individuals for a particular period at an agreed rate of interest. An overdraft is a form of credit provided by banks in which a customer is allowed to draw over the above the money in his account.
4. Book-me-down: This is very common within the low income earners in underdeveloped countries like Nigeria. This is a means whereby the customer will purchase goods on credit and write down their names. Payments may be made at the end of the month after receiving salary.
5. Leasing: leasing is a system whereby the owner of a property grants to another the right to exclusive possession for a fixed time in return for periodic payment. E.g leasing of houses.
6. Factoring: Factoring can be defined as a system whereby trade debts can be sold immediately for cash to factoring firm (bank) for a lower amount than the actual value of the debt. It is the business of purchasing and collectingaccounts receivable or of advancing cash on the basis of accounts receivable.
7. Budget Account:it is a system of account operated by departmental stores  where a customers agrees to pay a certain sum per month which enables credit up to eight times that amount to be obtained.

Features of budget account

• It is common in advanced country
• Choice of goods will be restricted to a particular shop
• It is common among the high income earners

8. Conditional Credit sales: It is an agreement for the sale of goods and not hire in which the title to goods do not pass completely until all installmental payment has been made. It is a sale in which the buyer receives title tothe property only upon the performance of some condition (usually the full payment of the purchase price)
9. Trading cheque or voucher: This system of credit entails a voucher being issued by a club which is formed to enable its members buy buy from specified local shops in the locality. there will be a certain percentage added to the the actual amount which will be paid at an agreed rate.
10. Finance House: Finance house is defined as the A financial institution that lends to people or businesses, so that they can buy things such as cars or machinery. Finance companies are often part of commercial banks, but operate independently.

Finance house mobilize funds from deposit from the public which attract high rate of interest or by borrowing from banks e.g merchant banks, commercial banks and insurance.

A finance house is a financial institution (often affiliated with a holding company or manufacturer) that makes loans to individuals or businesses.

11. Club Trading: It is a system of credit whereby some organizations set up clubs to collect regular contribution from members . This contribution can be withdrawn periodically in order to make purchases at the shops
12. Deferred payment:This is a system where ownership and possession are transferred immediately to the buyer from the seller after paying an initial deposit then the payment of the balance will be paid later. In deferred payment the seller cannot claim the goods if the buyer defaults in payment, he can only reclaim through court action.

Similarities between hire purchase and deferred payment

The similarities between hire purchase and deferred payment are:

• Durable goods are involved in hire purchase and deferred payment
• Initial deposit is required in both system
• Both accommodate instalmental payment and credit facilities
• The hirer or buyer can use and enjoy the goods before full payment is made.
• Both system of credit ensure that the buyer takes possession of the goods

Differences between Hire purchase and deferred payment

Hire purchase	Deferred payment
1.The price charged is higher	Price charged is lower
2.Goods are on hire	Goods are sold
3.Hire purchase favours the seller	Deferred payment favours the buyer
4.On default, seller can repossess the goods	Seller cannot repossess the goods
5. Durable goods are involved	Less durable goods are sold

Test and Exercise

1. Define credit
2. The things to be considered before giving out credit are ——————————
3. Explain the advantages and disadvantages of credit sale
4. Differentiate between deferred payment and hire purchase
5. What are the similarities between hire purchase and deferred payment
6. List and explain various types of credit sales
7. What is a finance house