Credit is extended when a product or service is sold on the basis of payment at a later date. The extension of credit creates additional administrative costs such as information gathering, credit checking, account establishment, billing ,and past due A/R management. There's also the cost of carrying A/R, the time value of money. Finally the customer may fail to pay and with that comes the cost of bad debt write-offs.
Some people will tell you that costs are incurred because customers require time to ensure they got what they ordered and more time to process the invoice. Others will tell you that customers need time to add value to the products or services they are buying, and to make sales to their own customers. Finally, some will tell you that they must incur the costs of credit because it's the customary way of selling in their industry, and that if they don't extend credit, their competitors will.
However, the only reason a business should extend credit is to generate a sale that would otherwise be lost—not just any sale but profitable sale. Any fool can make sales and lose money doing so.
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