Defining Credit

What is credit, you might ask? To some salesmen, it means extending a credit line for anyone who asks for a line. To others, it means selling to whoever has a need for your product or service without consideration to their paying abilities. Yet to others, credit means a complete due diligence before an order is approved and shipped. To individual consumers it means, their FICO scores, their reputation and financial standing. To others, it means dealing with credit cards and credit card companies. So, what is credit?

There are many definitions that have been proposed to describe the institution of credit. Among these definitions we find:

Credit is the ability of an individual or business enterprise to obtain economic value on faith, in return for an expected payment of economic value in the future. [Christie and Bracuti (1986:3)]

Credit is a medium of exchange with limited acceptance. It aids the exchange process as value moves from seller to buyer. After a period of time, the value initially received by the buyer is returned to the seller in the form of payments. [Cole and Mishler (1995:6)]

Credit is a privilege granted by a creditor to a customer to defer the payment of a debt, to incur debt and defer its payment, or to purchase goods and services and defer payment. [NACM (2003:1)]

From the above, we find that one of the most critical elements that have to be considered when an order is shipped on credit is the ability of the individual or the entity to pay for the order in the future. This in fact highlights the real meaning of credit. In fact, credit comes from the Latin word “credere” which means trust. It is a mutual trust between the grantor and recipient of the credit. Indeed, credit involves a great deal of trust and confidence in the ability, willingness and character of a company to deliver on its promises to the creditor. A creditor must trust that the customer, the entity to which credit was extended, will comply and pay according to the agreed upon terms. Credit also implies a reciprocal trust that the creditor will deliver what was contracted or agreed upon. Thus, credit is “a cooperative function between seller and buyer or between creditor and debtor. Both stand to benefit by their mutual trust” (Christie and Bracuti (1986:3).

Hence, “credit can be appropriately described as the transfer of economic value now, on faith, in return for an expected economic value in the future” (NACM, 2003:6).

In addition, the word credit encompasses not only the feature of trust, but also includes the process by which trust is reached based on numerical and judgmental decisions. The process of credit includes:

  1. Customer contact: Sales makes contact with prospect or client and an order is taken.
  2. Credit due diligence: The credit department reviews customer for creditworthiness to determine ability and willingness to pay.
  3. Order acceptance and approval.
  4. Order shipment: Order is shipped on credit.
  5. Collection and payment processing: payment is made on time and within terms and applied to customer account.

In conclusion, when we understand the real meaning of credit and its role in mitigating the risk, credit becomes our vehicle to maximize our sales. In essence, credit is an essential tool that can be used to increase sales, build trust with customers, and gain competitive advantage. Credit, if used effectively, could help a company differentiate itself from competitors and grow the business through creative options and alternative solutions. Building credit can also help individual consumers build their reputation and maximize their wealth.

Eddy A. Sumar, MBA, CCE, CICE, and CEW, is the Founder of ERS Consulting Services in Rancho Cucamonga, California; he is an International Trade Financing Consultant; a Consultant for the Center for International Trade Development (CITD); a member of the Guidepoint Global Advisors, and an Associate of Quote 2 Cash (Q2C). Mr. Sumar is a research consultant, author, and a public speaker and enjoys writing and traveling. Contact: e-mail: ealberto@aol.com.

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