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Business Credit Business
credit refers to extensions of credit primarily for business or commercial
purposes.
The fact
that business credit finances the intermediate and final stages of production
and distribution distinguishes it from consumer credit. Business credit
sales also yield a profit on goods sold rather than interest or investment
income, which distinguishes it from bank and investment credit. Unsecured,
open-account credit is the most widely used form of domestic business
credit. In open-account credit, the creditor reasonably expects the customer
to make repeated transactions and generally makes more credit available
to the buyer as the outstanding balance is paid. A typical business creditor
who sells on open account terms is relying specifically on the full faith
and credit of a purchaser. The seller establishes the terms of sale. Open
account terms are also called ordinary terms or standard terms, which
are discussed in detail in a later chapter. A secured
credit arrangement is one in which collateral is provided to the creditor.
By obtaining some form of security, the creditor can reduce repayment
risk. Examples where secured credit may be useful are a start-up business
or an undercapitalized business or an opportunity to sell an account that
cannot justify a high credit exposure. Security is obtained not only when
the buyer's financial condition is weak, but in order to guarantee payment
if the buyer's financial condition changes. While it cannot strengthen
a buyer's financial weakness, a secured credit arrangement does reduce
the likelihood of loss. Secured credit is defined in Article 9 of the
Uniform Commercial Code. It is important
to note that drafts, trade acceptances and promissory notes are not forms
of security. Each of these instruments is written evidence of debt. However,
no security attaches to the instrument. Sales to customers in other countries account for an important portion of U.S. business transactions. Today, there are more companies with more products entering more markets than at any other time in history. The ability to compete in the global marketplace has become a necessity and, as a result, credit has become global. The procedure for an export credit decision includes more elements than for a domestic decision. In addition to the traditional five Cs of credit analysis, other elements such as the risks associated with the economic stability of a country or country risk must be evaluated. The strength and stability of foreign currency versus the exporter's currency play a major role in the success of an international credit transaction. And, of course, the culture and customs of the buyer influence the credit transaction. These factors, country risk, currency issues and culture, add three more dimensions to the five "Cs" of credit. |
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