Offering Credit
Credit policies have changed over the years
- delayed payment until -estate settlement -life insurance benefits received - cash advances may or may not be handled by a firm - newspapers -flowers -honorariums - death certificates -church charges -grave openings
Revolving Account (Open End Credit)
- line of credit that may be used over and over again up to a certain borrowing limit - percentage of outstanding balance paid monthly - credit cards - may be paid at any time used as wanted/needed
Disadvantages of Offering credit
-Capital is tied up in merchandise bought by charge customers -Seller may need to add interest to cost of goods sold -Potential losses from bad debts -Customers may pay slowly because they overestimate ability for future payment -Customers more apt to abuse return privileges -Increase in operating and overhead costs due to expense of bookkeeping, sending out statements, and collecting payments
open charge accounts
-Customer obtains merchandise at time of purchase, with payment due when billed -No finance charges if bill paid on time -Generally no down payment
Truth in Lending Act
-Ensures customers are given terms of credit agreement -Requires creditors to show how finance charges are computed
Fair Credit Reporting Act
-Gives certain rights to credit applicants regarding reports written by credit bureaus -Creditors extend consumer credit that has finance charge or accept installments of 4 or more or if they extend credit more than 25 times a year
Advantages of extending credit
-Increase in sales -More personal relationships with customers -Credit customers likely to be more frequent patronizers -Credit customers likely to be more interested in quality & service than in price -Goodwill built up & easily maintained -Goods can be exchanged with greater ease -Access to useful records containing customer information -Establishment of credit history for customer
Credit and funeral homes
-Many funeral homes create agreements indicating that the purchase is a "cash transaction." Therefore: -a "late charge" or "penalty" is added if not paid within a specified period of time. -certain funeral homes may not have to comply with credit laws & regs. -Only creditors may charge "interest"
Installment Credit (closed end credit)
-Requires down payment, with balance paid over specific period of time in small payments -Finance charges -Long term credit, over 12-36 months
Collection Policy problems with collection
-The older an account becomes, the harder it is to collect -Aging of accounts receivable (aging schedule - aging accounts receivable based on length of time they have been outstanding) -Collection takes time away from other duties -Former customers may avoid a business out of embarrassment by past due accounts -Collection efforts tie up funds
Billing and collection procedures
-Timely notification of customers -Billing records and collection procedures -Past-due accounts -Collect directly by business? -Attorney? -Collection agency? -Deal with delinquent customers compassionately -Consider series of steps
Five Cs of credit
1.Character - purchasers, what type of person they are 2.Capacity - borrowers' capacity to repay 3.Capital - how much is borrower investing 4.Conditions - whats going on in industry or economy 5.Collateral - what you have to put down to secure a loan
common business credit sales terms
2/10, n/30 2% discount if paid in 10 days net bill is due in 30 days MOM (middle of month) EOM (end of month) CWO (cash with order) CBD (cash before delivery ) COD (cash on delivery)
