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Asked: 2022-12-29T04:05:31+00:00 In:

Explain four factors that may be considered by firn) when developing its credit policy. (8 marks)July 2020

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Explain four factors that may be considered by firn) when developing its credit policy.
(8 marks)July 2020

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    1. Creditworthiness of the customer: One of the main factors that a firm may consider when developing its credit policy is the creditworthiness of the customer. This includes evaluating the customer’s financial stability, credit history, and ability to pay back the credit extended to them. A customer with a strong credit profile is more likely to be approved for credit and may be offered more favorable terms, such as a lower interest rate or longer repayment period.
    2. Type of product or service being offered: The type of product or service being offered can also influence a firm’s credit policy. For example, a firm may be more willing to extend credit for high-priced, high-quality products or services that are less likely to be returned or have a longer lifespan, as these may be seen as a safer investment.
    3. Credit terms and conditions: The credit terms and conditions offered by a firm can also be a factor in its credit policy. This includes the interest rate, repayment period, and any fees or charges associated with the credit. A firm may tailor its credit terms based on the creditworthiness of the customer, the type of product or service being offered, and the level of risk it is willing to accept.
    4. Credit limit: The credit limit, or the maximum amount of credit that a firm is willing to extend to a customer, can also be a factor in its credit policy. A firm may set a credit limit based on factors such as the customer’s creditworthiness, the type of product or service being offered, and the firm’s overall credit risk tolerance.
    5. Credit evaluation process: The credit evaluation process, or the method by which a firm assesses the creditworthiness of a customer, can also be a factor in its credit policy. A firm may use a variety of methods to evaluate creditworthiness, such as reviewing a customer’s credit report, verifying income and employment information, and conducting a financial analysis.
    6. Credit monitoring and collection: The credit monitoring and collection process, or the method by which a firm monitors the payment of its credit and manages any delinquencies or defaults, can also be a factor in its credit policy. A firm may have specific procedures in place for monitoring credit payments and collecting on overdue accounts, and these may be outlined in its credit policy.
    7. Credit insurance: The use of credit insurance, or insurance that covers the risk of default or nonpayment by a customer, can also be a factor in a firm’s credit policy. A firm may require customers to purchase credit insurance as a condition of extending credit, or it may offer credit insurance as an optional service.
    8. Legal considerations: Legal considerations, such as applicable laws and regulations regarding credit and consumer protection, can also be a factor in a firm’s credit policy. A firm may need to comply with certain laws and regulations when extending credit, such as the Fair Credit Reporting Act or the Truth in Lending Act, and its credit policy may outline how it will meet these requirements.
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