Credit and status enquiries

The main reason for buying on credit is for convenience. Basically it allows us to 'buy now, pay later'.

1 Credit enables a retailer to hold stocks and to pay for them out of the proceeds of later sales. This increases the working capital and thus helps to
finance the business.

2 Credit enables the buying public to enjoy the use of goods before they have
saved the money needed to buy them.

3 Credit avoids the inconvenience of separate payments each time a purchase
is made.

The main reason for selling on credit is to increase profits. Credit sales not only attract new customers but also keep old customers, since people who run accounts tend to shop at the place where the account is kept, whereas cash cus­tomers are free to shop anywhere.

DISADVANTAGES OF CREDIT

There are a number of disadvantages in dealing on credit both for the supplier and for the customer:

1 It increases the cost of doing business since it involves extra work in keeping
records and collecting payments.

2 It exposes the supplier to the risk of bad debts.

The buyer pays more for the goods since the supplier must raise prices to
cover the higher costs.

REQUESTS FOR CREDIT

A buyer who makes regular purchases from the same supplier will usually wish to avoid the inconvenience of paying for each transaction separately, and will ask for 'open account’ terms under which purchases will be paid for monthly or quarterly or at some other agreed period. In other words the goods are to be supplied on credit.

Customer requests open-account terms (a)

Request

Dear

We have been well satisfied with your handling of our past orders and as our business is growing expect to place even larger orders with you in the future.

As our dealings have extended over a period of nearly 2 years, we should be glad if you would grant us open-account facilities with, say, quarterly settlements. This arrangement would save us the inconvenience of making separate payments oninvoice.

Banker's and trade references can be provided on request. We hope to receive your favourable reply soon.

Yours sincerely

Reply

Dear

Thank you for your letter of 18 November requesting the transfer of your business from payment on invoice to open-account terms.

As our business relations with you over the past 2 years have been entirely satisfactory, we are quite willing to make the transfer, based on a 90-day settlement period. In your case it will not be necessary to supply references.

We are pleased that you have been satisfied with our past service and that expansion of your business is likely to lead to increased orders. You may rely upon our continued efforts to give you the same high standard of service as in the past.

Yours sincerely

Customer requests extension of credit

Cash flow problem

Dear

We regret you have had to remind us that we have not settled your account due for payment on 30 October.

We had intended to settle this account before now, but because of the present depressed state of business our own customers have not been meeting their obligations as promptly as usual. This has adversely affected our cash flow.

Investment income due in less than a month's time will enable us to clear your account by the end of next month. We should therefore be grateful if you would accept the enclosed cheque for £ 200 as a payment on account. The balance will be cleared as soon as possible.

Yours sincerely

Lending restrictions and bad trade

Dear

STATEMENT OF ACCOUNT FOR AUGUST 20—

We have just received your letter of 8 October requesting settlement of our outstanding balance of £ 1686.00.

We are sorry not to have been able to clear this balance with our usual promptness but the present depressed state of business and the current restrictions on bank lending have created difficulties for us. These difficulties are purely temporary as payments from customers are due to us early in the New Year on a number of recently completed contracts.

Our resources are quite sufficient to meet all our obligations, but as you will appreciate we have no wish to realise on our assets at the moment. We should therefore be grateful if you would grant us a 3 month extension of credit, when we will be able to settle your account in full.

Yours sincerely

Customer requests credit extension due to bankruptcy