Meaning of Credit Sale
Credit sale means allowances of goods to customers in order to pay in advance.
In commerce, credit is the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future.
Credit is also a contractual agreement in which someone (borrower) receives something of value now and agrees to pay the owner of what is received (the lender) at some date in the future with or without interest.
Basis for credit sales
- Means of payment – Mode of payment has to be agreed on between the seller and the buyer.
- Financial status of buyer – The seller has to be sure the buyer would be able to pay as agreed before goods is released.
- Credit worthiness – This has to do with the integrity of the buyer
- Time of payment – Period of payment must be clearly stated
- Availability of guarantors – A guarantor is a person who is willing to stand on behalf of another person in case there is a default. Where necessary, the seller must ensure that there is a guarantor on ground for the buyer before rendering credit sales or services.
Advantages of credit sale
- Possession of goods without immediate payment.
- With good credit worthiness, one is able to meet urgent needs in times of financial snag.
- Encourages bulk purchase. There is increase in sales when seller gives room for credit facility.
- Increase in profit: higher prices are charged on credit sales, therefore it helps to increase the sellers’ profit.
- It increases buyer’s purchasing power.
- It increases seller’s rate of turnover, and also helps to reduce problem of holding goods for too long.
Disadvantages of credit sale
- Problem of nonpayment. This can kill a business, especially when the money involved is huge.
- Overbuying. With credit facility, customers stand the risk of buying what are not necessary, or more than are needed.
- It can lead to bad debt. Bad debts are debts that cannot be recovered.
- Capital can be tied down
- It can lead to court action if the buyer refuses to pay.
- Credit sales involves a lot of record keeping