Question

1. Is it a good idea to issue credit?

2. If you had a small business would you rather have a tight credit policy or a loose credit policy? How would this impact your business?

3. What type of action would you take if a customer was not able to repay its amounts owing?

Answer 1

Answer:-

1.Giving credit to customers has its own advantages and disadvantages.Advantages include increased sales and customer loyalty.Also,competitors may give credit to the customers hence it becomes necessary to give more favourable credit terms to the customers and be more competitive.Disadvantages of giving credit include risk of bad debt, regular follow up with credit parties for payment,additional capital to finance accounts receivables,low cash flow,etc.

2.If I had a small business I would have a tight credit policy as capital investment in small business is low and funds are required on a regular basis.Also, a small business may not be ready to take the risk of bad debts and extra finance cost.Though it will have a negative impact on my business but as transaction amount in small business will be lower, it would not be a problem for the buyer to pay amount on time.Also, if credit period is less the buyer will get an advantage of cash discount or early payment discount.

3.First of all, we should ask politely to make the payment to the customer.If a customer is not able to repay the amount he owes on time, we can charge late fees or interest on delayed payments.Also, regular follow ups with the customer to get the payments can be done.Even after above steps if the customer is not ready to pay, we should stop doing further business with them and take legal action.