Meaning:
Credit is a contractual agreement between a buyer and a seller, where a seller agrees to sell goods to a buyer who will pay at a later date. On signing the contract, the buyer automatically becomes the owner of the goods.
Sources of Credit
1. Credit Sales:
This is an agreement between a buyer and a seller whereby the seller agrees to allow the buyer to take possession of certain goods with a promise to pay on an agreed date in the future.
Advantages of Credit Sales
1. Increase in sales
2. Increase in Profit
3. Reduction in problem of stock being tied down
4. Enjoyment of goods without payment
5. Increase in standard of living
6. Means of meeting temporary needs for cash
Disadvantages of Credit Sales
1. Increase in price
2. Customers can over buy
3. Seller can repossess
4. It involves a lot of record keeping
5. It can lead too bad debt
6. Capital can be tied down
7. Problem of non-payment
2. Hire Purchase:
This is a credit arrangement for people who cannot buy and pay for capital goods. This arrangement enables the hirer to take possession of the goods after the initial deposit and makes a definite commitment to pay the balance on an installment basis.
Features of Hire Purchase
1. In hire purchase, buyers can take possession of goods but not ownership
2. Hire purchase is good for durable goods
3. It must be evidenced in writing (documented) and signed
4. The cash price and hire purchase price of the goods must be stated
5. The seller has the right to repossess the goods if the buyer fails to pay
6. It attracts higher prices
7. The goods will continue to be under hire and will not belong to the buyer
Differences between Hire Purchase and Credit Sales
Hire purchase is a contract of hire whereby the buyer takes possession of goods with an agreement to pay the price in installments. This means that goods are merely on hire and not owned by the buyer until the final installment is paid whereas credit sales is a contract of sale whereby the buyer takes possession and ownership with an agreement to pay the price of goods later or in installments.
3. Credit Card:
The popular system of credit is mostly used in advanced countries. It involves the use of a small plastic card to buy goods and services. Large financial institutions and stores issued it to their approved customers who are credit-worthy to buy goods and services on credit at a specified amount.
4. Leasing:
This is a system where the owner of an asset/property gives the right of possession of his property to another person or company for a fixed period and for a periodic payment. More capital-intensive assets or goods are usually involved in this system.
5. Loans:
This credit facility is obtainable from banks. In obtaining a loan, an individual, firm, organization or government borrows money from bank for a stated period at an agreed interest rate payable on the principal sum.
6. Overdraft:
This facility is made available to the bank customers who operate current accounts. It provides the customer an opportunity to draw a cheque greater than the amount he has in his account. However, it is required of him to pay interest only on the extra money withdrawn.
7. Mortgage:
Here, the customer is given a certain amount of money on request as a loan to buy plots of land or buildings of their own. Such an asset is used as collateral to secure the loan which is expected to be paid back along with interest at a stipulated time. The lender or bank is called a mortgage while the borrower is called the mortgagor.
8. Factoring:
This is a system of credit whereby a firm purchases the trade debt of another firm at a lower amount than the actual sum.
9. Conditional Credit Sales:
Goods are sold on credit to a buyer, but the title to the goods remains that of the seller. The property/goods become that of the buyer on full payment of the goods.
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