❑ Bills of exchange . Bills of exchange are commonly used for trade credit especially. They will be discussed in more detail in paragraph 6.3. ❑ Contra accounts . This method of payment is used when two enter- prises sell products or services to each other. Enterprise A sells fabric to enterprise B, and enterprise B in turn sells the clothing it manufactures to enterprise A. The two enterprises agree about the way in which differences in amounts owing will be paid. Informa- tion about the state of the accounts must be exchanged monthly to ensure that there is complete agreement about the outstanding amounts owed by both parties. ❑ Post-dated cheques . This method of payment can be used in the case of a relatively unknown buyer who cannot pay for the goods in advance. Enterprises granting consumer credit usually also accept post-dated cheques. The cheques are filed until they have to be paid in at the bank. This method can be risky because the enterprise cannot be absolutely certain whether the bank will pay out the cheque (and whether the buyer will indeed have the ability to pay at this later date). Sometimes debtors pay with post-dated cheques because they do not want their accounts to become overdue, for example when they are going on holiday. This situation should not be confused with the receipt of post-dated cheques some time after the goods have been received - it may be a sign of liquidity problems (that is, a sign that the person or enterprise is unable to pay). CMG111CE 192 CHAPTER 6
Another method of payment is advance payment . This means that the buyer must pay the account before the products or services are provided. This arrangement is often made if: ❑ there is doubt about the buyer ’ s ability to pay ❑ the enterprise is unwilling to accept any risk with regard to late payment or no payment ❑ the customer has just started trading (a new enterprise) Terms of advance payment include the following types of arrangement: ❑ Cash with order or cash in advance . This means that the customer must send the payment (for example a cheque or postal order) together with the order. In this case the seller bears no risk whatsoever. An example is when a person orders products from a mail-order service and sends a cheque together with the order. ❑ Cash before delivery . This arrangement is slightly less strict than cash with order. Here the seller may prepare and package the goods, but the goods are not delivered before payment has been received. Examples are a small business buying and paying for a computer at a certain enterprise, after which the enterprise delivers it to the small business ’ s premises; or someone buying a television set from Dions after which it is delivered to his home.
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