Reference no: EM131619411

Question - Extending credit to clients is an excellent way for businesses to increase revenues. The danger, however, in extending credit is nonpayment. While companies will face bad debts, the benefits often outweigh those losses.

Think about the credit card offers stating "you have been pre-approved" for credit. Opening the envelope you discover a credit card application with a request that you fill it out, sign and mail it back for evaluation. This process evaluates your credit worthiness to the credit card company as they want to minimum the number of non-paying cardholders. Once a cardholder defaults on their credit card debt, the credit card company decides to write off the "bad debt" using the direct write-off method or one of the two allowance methods (the percentage of sales and percentage of receivables methods).

Prompt

Discuss the importance of businesses extending credit to customers. What are the consequences of a credit policy that is too strict? Too lenient? How does their credit policy impact the amount of uncollectible accounts that need to be written off?

Think about large companies that either offer their own credit cards (think Lowes, Macys, Home Depot) and those who partner with Visa or MasterCard (think of Costco, REI, Cabelas) to entice sales. What are some advantages and disadvantages of each?

For your citation, you might use articles that show examples of tools available for businesses to determine creditworthiness. You can also find articles from experts that suggest pros and cons of extending credit.