What is a credit transaction?
A transaction in which goods and services are provided to the purchaser without him/her having to make any form of payment, or where a partial payment is made at the time of purchase. In St. Vincent and the Grenadines, this is commonly known as 'trust'.
Disadvantages of granting Credit
- Some customers will not pay. Bad debt occurs when goods and services are credited to customers but no payment is collected.
- Credit places additional strain on the already limited resources of micro and small enterprises.
- It may lead the business to experience problems with its cash flow, thus the entrepreneur may be placed in a situation where he/she is unable to:
- Meet the cost of his/her overheads
- Pay for purchases to replace items that were credited
- Pay wages and salaries
The Four C's of Credit
- Capital - How much cash the borrower has to make a down-payment.
- Collateral - The customer should have something of value which can be used to secure or guarantee what is credited.
- Capacity to repay - The customer must be able to repay.
- Creditworthiness - The customer must have a good credit rating.
Assumptions on which Credit is Given
- Customers intend to pay.
- Customers are able to pay.
- Nothing will happen to prevent customers from paying.
- That judgment made of the character and integrity of customers is accurate.
Some points to note:
- Always write down what customers want on the invoice/bill.
- You and the customers must sign the invoice as proof that both parties agree to the terms stipulated.
- Customers must be given the original copy of the invoice.
- Keep a copy of the invoice on the customer's file.
- Have a debtors' unpaid file to find out who owes your business money and the amount.
What is a Credit Limit?
This is the maximum or highest amount a business is willing to risk in a credit account.
Importance of setting a Credit Limit
- Reduces risk.
- It helps in monitoring your accounts receivables.
Factors to consider when setting Credit Limit
- The strengths and weaknesses of the product.
- Level of competition.
- The availability of opportunities.
- The margin of contribution of the product to your profits.
- The financial status of the customer.
- How long the customer is given to pay.
- The type of debt collection system that you have in place.
Credit Management Checklist
| Questions | YES | NO |
|---|---|---|
| Do you grant credit to first-time customers? | ||
| Do you always give full credit? | ||
| Do you set a deadline for the receipt of payment? | ||
| Do you give additional credit before you receive payment for the first transaction? | ||
| Do you set a limit on the value of goods and services that you credit to any one customer? | ||
| Do you set a limit on the items that you would not credit? | ||
| Do you keep a record of all credit transactions? | ||
| Do you ensure that customers sign the account/invoice? | ||
| Do you take steps to collect outstanding debts? |