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Terms of Sale The expression "terms of sale" has been applied frequently by creditors and others engaged in commerce to only one of several terms in sales transactions: the time for payment. A "term" is any condition in a contract. In addition to the time for payment, terms include the type of goods, the time of delivery and the carrier to transport the goods. To be more precise, terms which deal with the time and method of payment should be called "terms of payment" rather than "terms of sale."* Terms of sale can be used to manage credit risk. The most obvious example involves changing a customer's terms from open account terms to COD to a serious deterioration in the risk associated with offering that customer credit terms. However, credit terms can be used more subtly to control risk. Here is one example: Assume that a customer has a $10,000 credit line and net 30-day terms. Assume you are no longer comfortable with a $10,000 credit limit. Rather than simply reducing the credit limit to, say, $5,000, and potentially losing half of the business to a competitor, you could limit your risk by changing the terms of sale to net 15 days. The advantage of shortening the credit terms while offering the same credit limit is that the customer must pay faster, which should have the same effect as lowering the credit limit because faster payments reduces credit risk by reducing the average balance due.** *Source: "Manual of Credit and Commercial Laws," edited by Charles M. Tatelbaum and John K. Pearson, available at the NACM Bookstore. **Source: "Credit and Collection Manager's Manual" edited by Michael Dennis and Steven Kozack. |
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