Saturday, November 22, 2014

Credit period given to a buyer is distinct from the safety of your payment - this must be remembered always

Sometimes a business can confuse the duration of credit period given to a buyer with the safety of the payment. While it cannot be denied that a longer credit period [say six months] introduces the risk of unforeseen events taking place which could put the safety of the payment in jeopardy [compared to, say, a credit period of two weeks, in which you don't expect anything unforeseen to take place], still, these two things are distinct and should be treated that way. It's possible that your payment isn't safe with a buyer even if the credit period is only two days. It's also possible that a different buyer is so strong that your payment is safe even if the period is six months. Of course, a longer credit period means that you build the cost of capital appropriately into the price.

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