DIS iflstrument evidences part ownership

corporanon's capital.
6. It may be a bank money order or postal money order.
7. When the importer has complete confidence in th
exporter, the latter may be allowed to withdraw fund
to purchase the goods under the terms of an
irrevocabl confirmed letter of credit. LEARNING OUTCOî'îES
8. written promise on the part of the bank to hono
drafts drawn against it or for its account, by a Know and explain lack of uniformity in terms;
specifie‹ beneficiary under the specifications contained 2. List and understand the several factors in fixing terms;
in the lette of credit. and Explain and note other terms governing trade
transactions.
9. Like an ordinary promissory note, except that the collater
is indicated in the surface or on a separate
document.
As has been aptly pointed out in books on economics and finance, a credit
10. When a letter of credit operting bank issues a letter nnsaction is one in which goods, services or other values are exchanged with
addressed generally to persons ör companies indicatin fomises to pay for them in the future. The time element, which involves the
its intention to honor the drafts of beneficiaries under ptermination as to when payment shall be made is generally governed by the
specified terms. terms sale, commonly referred to and indicated on bills or invoices as "terms".
The rms measure or specify the credit period.

In the course of business operations and development, the adjectival term

dating” came into wide and popular use to express a modification of the usual
fms, by which the time of payment is extended on account of certain
circumstances contingencies. Obviously, the dating becomes part and parcel of
the terms of the
edit period.

Usage as well as custom over a long span of years have contributed to

the gtablishment in the various trades, sets of terms peculiar to each. These
terms are cferred to as "regular". In discussing an account or in giving
references, it has ecome axiomatic to say that “the account is being sold on
regular terms.

ack of Uniformity in Terms

As a matter of business practice, however, one is constrained to note

very ttle uniformity in the use of terms. While in some trades, the cooperation
of some groiips of grantors of credit has made it possible to establish and
accordingly enforce iaiform terms, nevertheless, in order trades where such
cooperation is non-existent, terms are frequently modified, not to say at times,
even disregarded.

As a general observation, terms vary in different trades. In fact, at times,

pven within the same trade, business houses sometimes differ in the terms
granted. Furthermore, it is possible that the same seller may differ in the terms
granted tti customers, and sometimes in the terms granted to the same
customer. This is
!frequent1y practiced as borne by a desire to gain a competitive advantage; sometimes
lhough, this is the result of pressure from the same buyers who do business on
a large scale basis.
 • CREDIT&COLLECEON " “
. -. '’ however,
Experience, • ' has shown time ‘ and again that advantages so
obtained are o1 short duration. This may be explained by the fact that variation
in terms, by and large, is at best only an artificial competitive weapon, and thus,
any advantage
, which it seems to have, usually proves to be a delusion. It ordinarily results
only in the buyer's playing one seller against another, and in creating an
unwholesome situation in the trade.

It need not be strongly stressed that fair terms, adhered to generally in

th trade make for wholesome practices and, in the long run, benefit the buyer as
wel as the seller.

FACTORS IN FIXING TERf•tS

Generally speaking, there are several factors that come into consideration
i the fixing of terms. Among such factors are the following: the nature and use of
th‘ commodity; the location; the circumstances of the customer; the purpose
behind the purchase; the credit standing of the buyer; and the regulations
enumerated in code of fair practiées.

The Commodity as a Factor

The nature of the commodity generally circumscribe the terms of sales.

Perishable products, like fish, vegetables and poultry are generally sold on the
cas basis, or close to cash terms. In the case of the latter, they are subject to very
sho terms.

It is axiomatic that products belonging to the category of basic necessitie

are highly saleable because the demand for them is almost universal, compared t
luxuries and non-essential items which has limited markets. The former is
generall sold on in the cash basis while the latter on credit terms, oftentimes, to
spark sale ot luxuries andaimilar others, discounts are at times offered as well as
credit terms Furthermore, piano, household appliances are often sold on
installment basis whi cover long periods of payment.

Construction materials are generally obtained by well-known

manufacturin firms engaged in housing projects and/or in the construction of
buildings on deferre payment. This is quite understandable since they do not
only extend large volum of business to suppliers of construction materials but
moreover on a year-long basis

Transactions that largely involve labor which is paid on cash by the seller
ar usually kept on cash or very short terms. Charges for the performance of
labor o the material of the customer may vary from net cash to net 60 days.
 CREDN&COLLECTTON

Some heavy agricultural equipment such as harvesters, Threshers, are sold

the installment basis, the seller receiving cash through the finance company and e
purchaser enjoying ample time with which to pay. So are bulldozers and road
sders and other heavy equipment.

Oographic Considerations

In a number of instances, the seller recognizes the distant location of the yer,
and accordingly make a concession in the matter of terms. This may be presented
by an extra 30 days time in which to pay the bill, or by allowing a longer pritid for
the taking of the discount. Thus, where the discount would ordinarily deductible
only if the bill is paid 15 days from its date, the seller may allow the yur cash
discount upon making payment 15 days after receipt of the goods. In ch cases, the
terms are sometimes expressed as "15 days, R.O.G," that is, 15 days m receipt of
goods.

esonal Dating

The "regular terms" of trade usually apply to shipments of orders received for
livery at once. Like, for instance, pulp and paper for use in printing or newspaper
blications. However, in many lines of a seasonal nature, it is necessary to place so-
led "advance" orders, that is, orders for later delivery, to coincide with the market
triand for such goods like ralncoats and umbrellas. Or school bags to use during
opening of school. And, of course, school uniforms for boys and girls.

Such orders give the manufacturer or importer time to get the merchandise dy
thus to enable him better to plan and to operate more economically. He may eive
the orders in advance, which are to be shipped at a certain date.

Some book stores in the Visayas place their orders for the needed textbooks lh
publishers as early as the advent of the summer months which enable them
Tnuet and fill in the demand for such books during the opening of the school in

yms in Retail Trade

Most retailers, if not all, grant credit to their buyers who continue to extend
if' patronage through the years. The terms of retail credit may vary from one iler
to another. As a common practice, though, such buyers are required to make ntlaly
payments to cover part of their outstanding obligations.

In the provinces, good customers make it a point to tender partial payments

pa time to time in accordance with agreements between sellers and buyers.

' . .

' - „ "',/' ..* “*. ‘ ' - ".'

 . CREDIT & COLLECTION y' < CRDDFFŒCOLLEC[

Standing of the Customer Under this arrangement, it is understood that all shipments made during
a ctilar month are to be considered as though they were made on the last
It need not be stressed herein that there exists a correlation between the day of tenth, and the terms run from the last day.
gran of credit and the time of payment. Until such time as payment is made,
credit cis is ever present. For this reason, some conservative businessmen refuse
to sell good For example, shipments made on any day during September are treated as
on credit to those customers with doubtful character — and, certainly, with unkno d ,s September 30. When the terms are, for instance, 2 per cent, 10 days, the
capacity to pay. In some cases, the seller may opt to sell to him a very limited ge to 2 per cent, 10 days, E.O.M. means that the September bills are payable
quanti of goods on credit terms. Sometimes, the credit period may be reduced, ort rilla of October, instead of being payable on 10 days from their various
that is fro dates lrber.
› 45 days to 15 days or so.
Cash Terms
A modification of the E.O.M. arrangement is sometimes adopted. This

Where it is intended not to extend credit imder any terms whatsoever, ’ }dt's for two payments a month. Under the plan, all bills dated from first to
should be made clear that goods shall be delivered to the buyer only when the sell the nth of the month are considered as dated ïrom the sixteenth to the end
obtains receipt of funds corresponding to value of goods ordered. This practi or thfi th •padare considered as dated the last day of the month.
is in accord with “Cash before Delivery”. Or the abbreviated term, C.B.D.
applies specifically to transactions in which the seller receives the cash payment as Other departures from the regular terms ocCur in order to meet competitive
condition to delivery of goods, an ironclad protection to the seller's interest. }((c›tis or the special exigencies of the buyer. Thus ifi a buyer's market, the
sharp for no good reason at all, may ask for the extra dating. Likewise, the
The most common practice in business transactions is known popularly unde seller may tu the importunities of buyers who plead special circumstances as
the abbreviated term C.O.D, which stands for its equivalent, “Cash on the opening cw store, the putting up of a new building. Special dates, the
Delivery’. For their protection, not a few businessmen insist that cash limitation upon uses for a period are among the reasons commonly
payments be tendere by buyers or by a corresponding cer.tified check issued by adduced or given.
the buyer. Where buyed and sellers have established long years of satisfactory
relationship, this practice i done away. Some businessmen are more than "I he assumption is that the buyer must keep his financial affairs in good
willing to transport their goods t their valuable customers even in the absence , and this angle is usualfy considered in connection with the request for extra
of a promise to pay. g. ’I“he consent through could mean the aggravation of a risk although at
times may exist some justifications in exceptional cases where the set-up is
essentially

OTHER TERP1S
Many factors are at work to justify the shortening of terms. The business

At this point, let us take note of other terms governing trade vt!r has been considerably quickened. This is due to more rapid facilities
for bution, and the tendency to buy in smaller quantities and carry less
transaction
stock.
Doubtless, while they are known through their abbreviations which are commonl In some lines, too, the intervention of finance companies in installment
' used in trade, nevertheless, it is correct to say that their essential feature or
feature gciions enables inanufacturers to realize cash on their shipments at the time of
will help contribute differentiating them from one another. Briefly, they are: tjt'l ivery.

End of Nonth unts

Frequency of purchase or other circumstances may make necessary to An integral part or the teTms is the discount. Apart from determinîng the
certain special treatment of individual cases. One such special arrangement is City of the bills, the terms may also provide insights into the periods prior to
th “E.O.M.” or “End of Month”.
tJ ly when cash discounts may be taken. In f£tCt, as observed, there appears
This arrangement springs from the need of the active buyer for conéentratio of business. E,O.M. makes it necessary for the buyers to issue
convenienc in making payments, and from the desire of sellers to encourage the checks to the selle throughout the month in order to earn discounts. It also
help facilitate the seller’ bookkeeping. In many lines, this arrangement is no durable misunderstanding in respect to the subject of discounts.
longer confined to the activ accounts, but is allowed, generally speaking.
Succinctly stated, the cash discount refers to the amount allowed for
payment ttc the maturity of the bill. Such payment reduces the credit risk of
the seller, cnables him to have earlier possession of funds. For this, he allows
a discount,
is usually in excess of the rate of bank interest.

.i.‘”” • '•.'., ‘ ‹fi ' ’, . ’•"• ’ ' '

 CREDIT & COLLECTION ‘
Where the terms
purchaser may wait 60 10
Should he pay the bill
are 1 per cent, 10 days, net 60 days; it means that
days from
days theits
after date of the
date, bill and
he may then pay the full arrio
deduct 1 per cent. In oth
CHAP T R
aoaioaa
words, the seller would be receiving payment 50 days before
1 per cent on the bill, Whjch is at the rate of about 7 'Zz maturity and he
allow per cent per
annum.

CASH AND TRADE DISCOUNTS unr Se o Sco e

A cash discount, strictly speaking, is the price paid for the earlier Explain lack of uniformity in terms.
paymen Of funds. It arises where the terms alloW the buyel’ to pay on a certain
date, net, o prior thereto, less a discgunt. The discount is the bonus offered to
induce the earli payment of the bill.
A trade discount, on the other hand, is intended as an
price. When published price lists are issued, the discounts allowance from
th render the price
greate flexibility in relation to varying q uantitiespurchased to changing market
conditio
Furthermore, the discount may be an allowance offered the end of a given perio
for purchases in excess of its stipulated amounts. As aatmarketing strategy, it
intended for the development of strong business ties between the seller and buye
It helps build long and lasting relationships between them.
Trade discount is distinctly an element of price.

What are the several factors in fixing terms?

’ * ‘
, s0
CREDIT & COLLECTION y•

CHAPTER 6
3. Discuss other terms góveming trade transactions.

DãóDDDODDßõöDOD
Date

provided if the statement is

t I. TRUE OR FALSE. Write T on the blank space
frect and F if the statement is incorrect.

1. The most common practice in business transactíons in known aS

COD.
2. Many factors are at work to justify the shorterúng oÎ term.
3. Trade Discount is a marketing strategy intended for the development
4. Define cash and trade discounts. Be able to cite example.
of strong business ties between the seller and buyer.
4. Dating do not become part and parceÏ of the terms of the credit
period.
not-existent, terms are
5 In order trades, where such cooperation is
frequently modified and even disregarded.
6. Terms do not vary in different trades.
7. run benefit
Fair terms make for wholesome practices and in the long
the buyer as well as the seller.
8. Fair terms should adhere togenerally in the trade make for wholesome
the long run.
practices which will benefit buyers and sellers in
continue to extend
Not all retailers grant credit to their buyers who
10. their patronage through the years.
Trade discount is not disÔnctly ăn element of price.
5. Differentiate CBD from COD.
et II. Fill in the blank with the correct answer.

1. The price paid for the earlier payment of funds.

2. This arrangement springs from the need o/ the active
buyer for convenience in making payments and the desire
of sellers to encourage the concentration of business.
applies to transactions in which the seller receives the
cash payment as a condition to delivery of goods, an
iron-
clad protectíon to the sellers interest.
4 It is intended as an allowance from the price.

83 '‘
, " ’• ' , *‘ ’ . -. ".
 CREDIT & COLLEWION
CREDIT & COM

5. The most common practice in business transacÿons.

6. Regular terms used for orders which will give the
manufacturer or importer time to get the merchandise
CHAPTER 7
made tö plan and to operate more economically. CREIIIT MANAGEMENT
7. Retailers practice where buyers are required to make
monthly payments to cover part of their outstandin
LEARNING OUTCOî ES
obligation.
8. When conservative businessmen refuse to sell goods
o credit to those customers with doubtful character 1. Know the importance of credit management;
an unknown capacity to pay. 2. Understand credit investigation and appraisal;
3. Know the credit work;
9. When the seller recognizes the distant location of th 4. Identify what a credit policy;
buyer and accordingly make a concession in the
matte of terms. S. Explain the credit file;
6. Identify credit policies of commercial houses;
10. It is where the nature which generally circumscribe 7. Value of granting credit;
the terms of seller. 8. Understand the importance of sound credit management; and
9. Explain what credit frauds are.

The function of credit may be briefly summarized in the following words:

To nd profits in the field of business activity which lies between the area of safe
risks ncJ those definitely poor.

For this very reason, the boundless effort of every business organization
to crease its profits by doing and arrying all the business it can on sound
footing has ivcn birth to the science of credit management.

mportance of Credit Management

There is hardly any business concern today which is not engaged in the
mint of credit of one type or another. However, briefly pointed out, granting
credit tone thing and collection another. Thus, there is a need for a system
which will stire close collaboration between the giant of credit and its
co11ecton. While it is tic that selling goods and rendition of services only to
customers who have shown ci demonstrated their willingness and ability to
pay on the basis of their past ectirds would doubtlessly reduce the incidence of
risks, nevertheless, such policy ill evidently result in a reduction in sales
volume and ultimately work adversely giiinst the interest of the firm.

On the other hand, precipitous and indiscriminate granting of credit to

all pcs of customers, while increasing sales volume, could undermine a firm
and
i zlaur its collapse. Hence, the need as well as the importance of a sound and efficient
url it management.

94