Unit-3 CUSTOMER CREDIT

UNIT-3

CUSTOMER CREDIT

Credit

            Credit denotes delay in payment. The concept of credit in business signifies buying now paying later. The buyers are allowed a fixed period of time to repay the purchase price after the goods are delivered, it is called credit period.

Needs of Customer credit.

1. To acquire goods instantly without having money in the hands of buyer.

2. To postpone the payment by the buyer.

3. To increase sales of the seller.

4. To attract the consumers to the shop.

ADVANTAGES OF CUSTOMER CREDIT

Advantages to the buyers.

1. It helps top get goods without having instant payment.

2. It enables the buyer to postpone the payment.

3. It is suitable to get high valued goods at nominal payment- installments

4. It enables the lower income people to buy standard goods.

5. It brings good relationship between the buyer and the seller.

Advantages to the sellers.

1. It increases the sales of certain goods.

2. It helps to maintain regular customers.

3. It reduces the warehousing costs.

4. It increases the revenue of the seller.

5. It brings good relationship between the seller and the buyer.

DISADVANTAGES OF CUSTOMER CREDIT

Disadvantages to the buyers.

1. It increases the purchasing habits among the buyers.

2. It brings unusual liabilities to the buyers if they purchase without being aware of purchase price.

3. It brings the burden of over payment of interests.

4. Further credit would be allowed based on the credit worthiness of the buyers

Disadvantages to the sellers

1. Chance of bad debts will be high

2. It brings over burden to maintain accounts for each customer.

3. It increases the liability due to any faults in sold products

4. It makes difficult to recover the sold products if any delay is occurred from the buyers.

TYPES OF CUSTOMER CREDIT

Customer credits are broadly classified into two categories. They are long term and short-term credits.

SHORT TERM CREDITS.

            Short term credits are credits which should be settled within one year.

1. Credit account or Trade credit

            Credit account is an informal method of credit by which regular customers are allowed to take delivery of goods at any time without paying immediately. Normally the buyers settle the dues at the end of each month. The seller has to prepare each credit account for the buyers individually for entering the delivery and payment. No need of interest in the allowed credit period.

2. Credit card.

            This is a plastic card issued by the bank in association with the credit card companies. This card can be used for purchasing goods up to a limit without having cash in hand. End of each month the card holder should repay the due amount to the issuing bank. High rate of interest would be charged on the due amounts.

            Eg:- VISA, Master, American Express, etc

3. Store card

Store cards are similar to credit cards, except that while credit card can be used anywhere, store card can only be used in a specific store or group of stores. It is issued by the group of specific stores for their customers. The card holders are given a credit period to settle the dues. High rate of interest is the main disadvantage of store card.

LONG TERM CREDITS

1. Hire purchase agreement.

            In this agreement the goods are hired to the users who are given with an option to purchase them at the end of the hire period. Consumer durables such as freezers, stereo, washing machine, air conditioner, furniture, etc can be sold in this method.  In this method the goods do not become the property of the buyer until the last payment has been made. Buyer can pay the purchase price in installments as rent. When the installment sum equal to the original full price plus interest has been paid, the buyer may then exercise an option to buy the goods at a predetermined price or return the goods to the owner.

2. Conditional sale agreement.

In this method, the  buyer takes the possession of a product by paying the purchase price in equal installment. But itsownership and the right of repossession remains with the seller until the buyer pays the full purchase price. Capital goods such as machinery and equipment, land  and building can be sold in this method.

3. Deferred payment (Extended credit)

            In this method, on payment of first installment or deposit the goods become the property of the buyer. Less expensive goods and second-hand goods are sold under this method. It brings high burden of bad debts to the sellers.

Difference between Hire purchase and Deferred payment.

Hire purchase agreement	Deferred payment
1. It is an agreement to hire the goods with an option to buy. 2. Buyer becomes the owner of the property after paying the full amount. 3. Seller can repossess the goods if the buyer makes any delay in payment. 4. It is suitable for consumer durable goods. 5. Less chance of bad debts to the sellers.	1. It is an actual sale. 2. Buyer becomes the owner of the property as soon as he pays first installment. 3. Seller cannot repossess the goods which sold once. 4. It is suitable for second hand and less expensive goods. 5. High chance of bad debts to the sellers.

Difference between credit card and debit card.

Credit card	Debit card
1. Issued by the banks linked with credit card companies. 2. It is type of short term credit. 3. Interest is payable to the banks. 4. Rate of interest is variable and high. 5. Card holders have to pay later.	1. Issued by the banks may or may not linked with credit card companies. 2. It is not a credit at all. 3. No need of interest payable to the banks. 4. No need of interest payable. 5. Card holders have to pay before using it.