Credit standards, Finance Basics

Credit Standards

A firm may follow a stringent or a lenient credit policy. The firm subsequent of a lenient credit policy tends to sell on credit to customers on extremely liberal terms and credit is granted for a longer time. Firms following a stringent credit policy on another hand sell on credit on a highly choosy basis simply to those customers who such have proven credit worthiness and who that are financially strong.

However a lenient credit policy will result in increased sales and increased contribution margin. Therefore, these will result also in increased costs like:

1.Increased bad debt losses
2.Opportunity cost of tied up capital in obtainable
3.Increased cost of carrying out credit study
4.Increased collection cost
5.Increased discount costs to encourage early payments

Posted Date: 1/31/2013 8:15:39 AM | Location : United States

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