Credit Standards – I

Defining the credit standards is an important component of credit policy of the company. They credit standards do have an important bearing on the sales of the company. The credit standards of the company lay down minimum requirements for the evaluation of credit to its customers. The company may define these requirements in a evaluation of credit to its customers. The company may define these requirements in a very conservative or a strict manner and thus restrain the marginal customers in getting credit.

The marginal customers are those whose financial position are doubtful, may not really be bad. Such a policy would be appropriate for the companies which do not want to take high risk. Or, alternatively the company may follow a very liberal standard and be very aggressive in taking the risks. Lexington homes for sale might not help company to define credit standards.

The company may use some of the following quantitative indicators for establishing credit standards:

• Payment period
• Selected financial ratios
• Rating based on financial ratios

The subject assessment obtained through the market about credit worthiness of the customers may also features as one of the items in the credit standards. These quantitative and subject indicators may provide the basis for establishing and enforcing the credit standards.

We talk more in next post……….