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Credit terms are the payment terms mentioned on the invoice at the time of buying goods. It is an agreement between the buyer and seller about the timings and payments to be made for the goods bought on credit. It is also known as payment terms.
How much credit is to be extended?
If you are finding it difficult to decide as how much of credit you can extend to your customer then this decision of yours has to be based on how much risk you are willing to take or get exposed to in the event of default in payment from the borrower. We call this as credit exposure in business language.
For example, if you have sold 4 lakhs on credit, your credit exposure in the event of default will be Rs. 4 lakhs.
Here is why a formal credit policy will help your business. Your credit policy will define the credit limits you are willing to give your customers, i.e. the maximum amount of credit you can give to your customers.
Your policy should also need to outline the maximum credit period you want to give to your customers and the process your business will follow to approve credit terms, exceptions and the process for handling violations.
Here, the customer is allowed a time benefit and the seller expects the bill to be settled before the due date. Typically, the time limits are set before the transaction is made.
The credit you lend to your customer depends upon the creditworthiness of your customer. This could be based on the volume of transactions, the capacity of repayment, historical performance, etc.
Depending on the amount and credit period, sellers do charge interest, either for the entire credit period or only for an overdue period.
Credit terms adopted by the businesses differ from each other and the credit you would lend to a customer could be totally different for another customer. There is no right or wrong about the type of credit terms applied by you. It’s all about what works better for your business, you and your customer.
Irrespective of the type of credit terms you choose, here are a few tips which will help you to be on top of credit sales.
Find out how TallyPrime will help you in defining and managing credit terms?
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