Hello you are welcome to this class on CREDIT SALES: “Explore the advantages and disadvantages of credit sales. Learn how they can boost sales and customer loyalty while understanding the risks like bad debts and cash flow challenges.”
Table Of Contents
- Meaning Of credit
- Advantages of credit sales
- Disadvantages of credit sales
- Revision Questions for Students
The Meaning of Credit
Credit occurs when A seller Grant permission to the buyer to take possession and enjoy a commodity with a promise to pay in the future. It is the process by which goods and services are transferred to the buyer from the seller for his use and enjoyment without value being given immediately. The credit worthiness of the buyer must be taken into consideration before granting credit so that it will not lead to bad debts.
This can be obtained through the status inquiry agency. Before granting credit, there must be a contractual agreement between the seller and the buyer. The use of credits in transactions has increased tremendously in recent time. Despite shortcomings, credit system of transaction has played prominent roles in facilitating trading activities.
In this hall, we’ll delve into the advantages and disadvantages of credit sales to help businesses decide whether this strategy is right for them.
Advantages and Disadvantages of Credit Sale
Below are the Advantages of credit sale in commerce:
- Increase in Sale: Credit sale can lead to increase in sales of goods.
- Increase in profit: It can bring increase in profit as higher prices are charged for credit transaction.
- Reduction in problem of stock being tied down: Customers can possess and enjoy Goods without giving value in needed to immediately.
- Increase in standard of Living: Another advantages of credit sales is that Credit sales can increase the living standard of the people as buyers can buy goods they never thought they could afford to buy, e.g. cars.
- Means of meeting the temporary needs for Cash: Credit can serve as a means of meeting temporary needs for cash because the individual can buy on credit and use the cash for other things.
- Encouragement of bulke purchase: Credit can also encourage bulk purchase.
Disadvantages of Credit Sales
- Increase in Price: Credit sales lead to increase in the prices of goods.
- Customers can over Buy: The customer can be tempted to buy more than what they can afford.
- Seller can Repossess: The seller has the right to repossess the product if the last instalment is not paid.
- It involves a lot of record keeping: Credit involves a lot of credit keeping as both cash and sales record must be kept.
- It can lead to bad debt: it can lead to a situation whereby some debt cannot be recovered.
- Capital can be tied Down: Another Disadvantages of credit sales is that the working capital can be tied down and eventually eroded.
- Problem of non-Payment: There is always the problem of non-payment by buyers.
- Business can be Liquidated: Too much credit transactions can lead to the liquidation of an organization,.e.g, National Bank of Nigeria before it resuscitation in 2000.
- It can lead to court Action: Credit sales can lead to court action if the buyer refuses to pay.
- Increased Borrowing Costs: To cover delayed cash inflows, businesses may need to borrow funds, incurring interest and other costs.
Conclusion
Credit sales can be a powerful tool for increasing sales, building customer loyalty, and staying competitive. However, they require careful management to avoid risks such as bad debt and cash flow challenges. Businesses should implement strict credit policies, conduct regular customer assessments, and maintain a balanced approach to ensure the advantages outweigh the disadvantages.
Whether or not to offer credit sales depends on your industry, customer base, and financial health. By understanding the pros and cons, you can make informed decisions that align with your business goals
Thanks for reading, I believe you have noted down the meaning of credit? The Advantages and Disadvantages of credit sales? Good.
Now I will be taking you to my next article on types and sources of credits
Revision Questions for Students
- What is the meaning of credit?
- Sate the advantages of credit sales in commerce
- State 5 Disadvantages of credit sales