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Credit Terms

When the Credit Department has determined that a particular client is an acceptable credit risk, it has a choice of terms on which such credit may be granted.

The most common selling terms are discussed here, with a view to familiarising you with both regular terms and those terms which may be used in cases where it seems desirable to lower the credit risk.

Factors Influencing Credit Terms

The credit terms offered to any particular client will be determined by a number of factors. The principal considerations are specified below.

Credit Policy

The terms offered must be consistent with the stated policy of the Credit Department. Shorter terms will generally be offered in conditions requiring a restrictive credit policy; longer terms are consistent with a more liberal policy.

Industry Terms

Similar terms are generally adopted by concerns within an industry, though they vary sharply from industry to industry. Terms that are customary in your industry are a result of many factors. One of these is the period for which the purchaser will have the goods. The terms extended by the seller rarely exceed the length of time that the buyer needs to process and/or resell the goods, and frequently, are shorter than this period. This principle is illustrated in seasonal industries where the terms given in the off-season are often longer than the terms given during the active selling season. Another factor is the competitive conditions existing in the industry. The more competitive conditions in the industry of the seller, the longer the selling terms will tend to be. You should be aware of the terms typical of your industry.

Credit Evaluation of Customer

The first two factors will determine what a seller considers as regular terms. These are the terms given to almost all of a company’s customers. However, the condition of a particular customer may indicate that special terms be offered. Special terms usually differ from regular terms in length of time, and are generally reached by an agreement between the buyer and seller. For example, shorter credit terms may be offered to a financially weak customer, while longer terms may be offered to an established reliable customer who is temporarily in a tight financial condition.