Credit terms

Definition

Credit terms specify the conditions under which a seller will extend credit to a buyer. These include the payment due date, any discounts for early payment, and the interest rate applied for late payments.

5 Must Know Facts For Your Next Test

1. Common credit terms are expressed as '2/10, net 30', meaning a 2% discount is available if paid within 10 days, otherwise full payment is due in 30 days.
2. Credit terms affect a company's cash flow and working capital management.
3. Trade credit is often used by businesses to improve their liquidity and manage short-term financial obligations.
4. Stringent credit terms can reduce sales but minimize the risk of bad debts.
5. Effective receivables management includes regularly reviewing and adjusting credit terms based on customer payment history and market conditions.

Review Questions

• What do the numbers in the term '2/10, net 30' signify?
• Why are credit terms important for managing working capital?
• How can altering credit terms impact a company’s sales and cash flow?

Related terms

Accounts Receivable:

Amounts customers owe for purchases made on credit that are to be collected in the future

Trade Credit:

A type of business financing where a supplier allows a buyer to purchase goods or services on account without immediate payment

Cash Flow Management:

The process of monitoring, analyzing, and optimizing the net amount of cash receipts minus cash expenses