Credit sale
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A credit sale is a transaction in which a customer purchases goods or services on the promise that payment will be made at a later date. From a management perspective, credit sales involve a greater level of risk than cash sales, as there is no immediate guarantee of payment. To offset this risk, credit sales require that customers provide additional information such as credit references, creditworthiness, and bank account information. Management must then evaluate this information and determine if the customer is a viable credit risk. If approved, the customer may be given a credit limit and extended an invoice for payment at a later date. Furthermore, management must monitor credit sales to ensure timely payment and maintain a healthy cash flow.
Example of credit sale
- A clothing store offers their customers the option to purchase clothing items on credit. The customer is required to provide their name, address, contact information, and a valid form of identification. The store then runs a credit check to determine the customer’s creditworthiness, and if approved, the customer is given a credit limit and extended an invoice for payment at a later date.
- A home improvement store allows customers to purchase goods and services on credit. The customer is required to provide their name, address, contact information, and a valid form of identification. The store then runs a credit check to determine the customer’s creditworthiness. If approved, the customer will be given a credit limit and extended an invoice for payment at a later date. The store must then monitor the customer’s payment of the invoice to ensure timely payment and maintain a healthy cash flow.
- A car dealership offers customers the option to purchase a vehicle on credit. The customer is required to provide their name, address, contact information, bank account information, and a valid form of identification. The dealership then runs a credit check to determine the customer’s creditworthiness, and if approved, the customer is given a credit limit and extended an invoice for payment at a later date. The dealership must then monitor the customer’s payment of the invoice to ensure timely payment and maintain a healthy cash flow.
When to use credit sale
A credit sale can be a useful tool for businesses looking to expand their customer base and increase sales. It allows customers to purchase goods or services on credit, instead of paying upfront. Here are some of the situations in which a credit sale might be appropriate:
- When a customer does not have the cash available to make the purchase, but has a strong credit history and is willing to pay the balance by the agreed-upon date.
- When a customer is in need of a large purchase, such as a car, but does not have the entire amount required for a down payment.
- When a customer is purchasing from a business for the first time and is unsure of the quality of the goods or services. A credit sale allows them to make the purchase without the risk of paying for something that does not meet their expectations.
- To create loyalty among existing customers, businesses may offer special incentives such as discounts or extended payment terms if the customer chooses to pay with credit.
- When a customer is interested in making a large purchase but has difficulty obtaining a loan from a traditional lender. A credit sale may be the only way for them to make the purchase.
Types of credit sale
A credit sale is a transaction in which a customer purchases goods or services on the promise that payment will be made at a later date. There are several different types of credit sales, including:
- Installment payments – Installment payments allow customers to make multiple payments over a certain period of time. These are typically used with larger purchases that require a larger payment structure.
- Revolving credit – Revolving credit allows customers to make purchases up to a certain limit and then pay back the amount over time. This type of credit is often used with credit cards.
- Layaway plans – Layaway plans allow customers to make small payments over a certain period of time until the purchase is paid in full.
- Deferred payment – Deferred payment allows customers to purchase goods or services and delay the payment for a certain period of time, usually with no interest.
- Lease-to-own – Lease-to-own allows customers to rent a product and eventually own it after making a certain number of payments.
- Rent-to-own – Rent-to-own allows customers to rent a product and eventually own it after making a certain number of payments and paying a certain amount of money up front.
Limitations of credit sale
A credit sale involves certain risks and limitations, which must be considered before extending credit to customers. These include:
- Risk of Non-Payment: When selling on credit, there is an inherent risk that the customer may not pay for the goods or services provided. To mitigate this risk, management must evaluate the customer’s creditworthiness and require bank account information to ensure payment.
- Cash Flow Issues: Credit sales can cause cash flow problems as payment is generally not received until after the goods or services have been provided. This can lead to liquidity issues and may require the business to borrow money to cover expenses.
- Increased Administrative Burden: Credit sales involve more paperwork and administrative effort than cash sales. This includes verifying customer information, issuing invoices, and monitoring payments.
- Loss of Customers: Customers may be put off by the requirement to provide additional information or may feel that the terms of the credit sale are too strict. This could lead to customers choosing to purchase from a competitor instead.
Suggested literature
- Kong, J., Zhou, Y., Lai, H., Zhang, F., & Zhou, Z. (2016). Analysis of credit sale risk of emerging market product. Procedia Computer Science, 91, 362-371.
- Adelson, M. W. (1935). The Mechanics of the Instalment Credit Sale. Law and Contemporary Problems, 2(2), 218-243.
