Sunday, July 5, 2020

The concept of Credit

Dear Editor

Simply defined, credit is the supply of goods and services now, in exchange for a promise to pay later. It follows that it is true to say that a sale is only complete once the goods or services are paid for and money is in the bank.

Most business trade is based on credit as cash is never readily available and occurs when the Credit Grantor supplies goods and services to a customer on the basis that payment for these goods/services will be made on a specific date in future. Hence there should be mutual trust between the two parties.

It is the concept of trust that is the entire basis for the business processes that make up the whole concept of credit. Trust implies that there is a risk, this risk being that the credit receiver may either not be able to pay, or not willing to pay for the goods and services, on the future date when the payment is due.

This brings in a key ingredient of credit management which entails the suppliers approach to assessing the risk of conducting the trade/sale and managing the risk that is inherent in the relationship with its customers.

Every sale is important and it is a priority to collect monies promptly, thereby safeguarding the assets of the company and ensuring that profit is realized from that credit sale. Note that when the account remains outstanding beyond the due date, the cost of financing account erodes the profitability of sale and increases the profitability of the account turning into bad debt.

When sales personnel make their first contact with the prospective customer, it is their responsibility to gather as much information about the prospect as possible. On the other hand the customer should be informed of the payment terms and possibly the nature of the contract. It is important that all customers fully understand the terms and conditions upon which credit is being extended. Once the customer fully understands the terms and conditions the likelihood of default becomes minimal. This process establishes the customer on the path toward being an asset to the company.

No customer should take offence if payment is requested when it is due, provided it is handled in a polite and proper manner. As a customer you should be in a position to consult your credit grantor if during the life circle of the contract the terms become unbearable. In most cases due regard and consideration is accorded to customers who face unfortunate circumstances provided they do not shy away to approach the Credit grantor. The service provider might be willing to relook into the contract and should such an arrangement be made it should be documented and signed to ensure no misunderstandings in future from either party.

It has to be accepted that the conditions of conducting trade and the business conditions for customers, will change over time. Events will occur that turn good credit risks into bad credit risks. Credit evaluation is an ongoing business processes and needs to be assessed for each customer so that poor payers do not stifle the prospects of good payers to have access to credit.

This needs a proactive approach in customers knowing their historical perspective as far as credit is concerned. Note that in credit circles History shapes the Future because the future is never definite.

Vincent Galeromeloe

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Sunday Standard June 28 – 4 July

Digital copy of Sunday Standard issue of June 28 - 4 July, 2020.