What do you mean by credit terms? What are its various aspects?
Credit terms are the conditions under which the company extends the credit given to the customer. This involves various aspects which are as follows:
Credit Period : It is the time allowed by the company to the customers to pay their dues. At the end of this period the customer is supposed to pay for all goods and services which he has purchased. Duration of credit period depends on various factors such as:
- In case of products having inelastic demand, the credit period may be small.
- Nature of industry also affects credit period.
- Credit period may also be affected by attitude of management.
- Credit period may also depend on the amount of funds available and possible bad debts.
Credit Limit : The maximum amount of money one is allowed to borrow. A bank or another financial services company may extend a credit line to a client, which is essentially approval for a loan or series of loans to be given on demand from the borrower. The borrower is under no obligation to actually take out a loan at any particular time. The maximum amount for which a particular borrower is approved is known as the credit limit. Banks and financial services company do not extend loans past the credit limit. For example, one may have a credit card with a credit limit of $2,000; if one attempts to put $2,100 on the card, the bank will decline payment. A good credit report and a regular history of loan payments may result in the credit limit being raised.
Discount Policy: In this policy discounts are given to speed up the collection process by inducing the customers to pay the dues as early as possible.