Normally, you would expect your boss or for that matter, your company to pay up your salary as the month begins. However, there are several instances where you can see companies that credit your bank account only after the calendar hits the 7th, 8th, or even the 10th of the month. Now, this might seem a little inconvenient to you but this helps in proper control over the functioning of the firm. Companies generally set a term of 30 days with their clients or customers for the payment of the invoice. This payment circle is mostly calculated at the starting week of the month.
Say for example that a company provided its services to “Z” client on 3rd of the month. Now, the client “Z” has a time-period of 30 days from the date of purchase of service to pay up the invoice amount. This is why most salary payment goes as far as the 10th of the month.
Now, you might wonder if there is a term for this method. Yes, there is. It is known as the credit period.
What is Credit Period?
By definition, credit period can be established as a time frame starting from the moment when a particular customer purchases any product from your firm, till the time due date of the payment. In simple words, it is the overall time period allotted to a customer to pay the price of the product he acquired from your company.
Why Credit Period?
Most companies set up credit policies with their customers and vendors to help make the purchases on account. The credit purchases made this way help accelerate commerce while increasing the sale. Essentially, it allows the customers to buy items before they acquire the fund to purchase the products.
Now, before a sale via credit can be made, the credit terms need to be established. The standard system for transactions in most of the industries is 2/10 N/30. This directly suggests that any customer paying up for his/her purchase within 10 days can get himself/herself a cash discount or 2 percent. If he/she doesn’t pay up within 10 days, the customer needs to pay the price for the complete invoice within a term of 30 days starting the date of purchase. This time frame of 30 days is termed as “Credit Period”. Simply put, it is the total time a seller provides the buyer for his/her credit purchase.
Now that you got the basic idea of what Credit Period is, let get to the part where we explain to you the benefits it house for buyers as well as suppliers.
Business credit is termed as the most affordable form of capital finance. Other forms of capital finance like cash credit, bank overdraft, etc come with interest costs attached to the same. When you take a look at in on a practical basis, there is simply no interest attached to business credit. However, this holds true only if the dues get paid within set credit period as listed by the creditor/supplier.
2-Early Payment Discount:
Business credit isn’t just an interest-free finance source, but it also gets you a discount when paid before the set time period. If paid by the 10th day, buyers get a good discount on the total invoice with no interest charge during the 10 day period.
The most crucial characteristic of business credit is the fact that it can be acquired effortlessly to be utilized for various purchases. The “purchase” is an important and essential trait for any business. The business credit is executed during this purchase function. To sum it up, there is no special way to obtain business credit. The only thing one needs to do is make the payment a little later but before completion of 30 days or a period set by the firm.
Accounting serves as an integral faction of any firm and managing the trade credit actually doesn’t require much effort, just the normal accounting & administering during payment which is a normal function of any profit-making business.
5-No Banking or Legal Botheration:
Since this financing acquisition process comes with no formal instrument for negotiation being executed at any given instance, it is completely free from legal repercussions. There is nothing like a fear of the account going as an NPA or Non-Performing Asset.
In this competitive market, business credit from the supplier’s viewpoint acts as a promotion. This means the more liberal the business credit terms, the higher goes the sales for the suppliers. There is an evidently direct correlation in sales generated and credit terms.
Now, it is evident that any credit provided by the supplier can’t be deemed a donation as it needs to be returned. The overall cost for extending credit on the purchases is fairly compensated as the seller usually marks the products at a price higher than average. This comes as a win-win for both buyer and seller. While the seller gets a bit extra on his products, the buyer gets his stuff in absence of cash. No business firms are completely dependent on cash payments.