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Credit & Collections Kit For Dummies® by Aaron Larson, Steven A. Harms

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Chapter 2

Credit 101: Defining and Applying Credit Concepts

In This Chapter

Defining credit

Understanding the competitive forces at play in credit extension

Establishing and practicing sound credit policies

Using the five Cs of credit to your advantage

Formally speaking, credit is an agreement to pay for goods or services at a future time. A creditor allows the debtor to receive goods or services without immediate exchange of payment and thereby assumes a risk of not being paid. But if we can be less formal, perhaps you’ve quipped “I’d rather owe it to you than cheat you out of it.” Or if you’re a fan of classic cartoons, as Popeye’s friend says, “I’d gladly pay you Tuesday for a hamburger today.”

Dun and Bradstreet, one of the oldest names in the credit and collection industry, defines credit as “man’s confidence in man,” and sometimes the simplest definition is the best. After all, at their heart, credit transactions are extensions of trust and defaults are the betrayal of that trust.

Whether you regard credit as a valuable business tool or as a necessary evil, to succeed in modern business you need to understand it. Virtually all commercial and consumer transactions are presently conducted on credit terms, and credit transactions amount to trillions of dollars annually. Even when the economy is strong, operating your business without buying and selling on credit terms is no longer practical. How many of your customers are willing to pay immediately? Probably not many. With ...

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