These are the various agreements/conditions agreed upon between sellers and buyers regarding how debts arising from their transactions should be settled. These conditions include;
Terms of payments are broadly categorized into two;
a. Cash Terms of payments
Cash terms of payment apply when a buyer is required to pay for goods or services immediately before or after delivery. They include the following:
a) Spot cash-This is where payment is done at the point of purchase.Mainly used in retail businesses where customers are required to pay as they get the goods or receive the service.
b) Cash on Delivery (C.O.D)
-This is where the buyer pays for the goods (or services) as soon as they are delivered to his or her premises.
c) Cash with order (C.W.O)
This is where the buyer is required to pay for the goods when making the order for the goods or the services.
Circumstances under which C.O.D and C.W.O are appropriate
d) Prompt cash;
this is where payment should be made within a few days (normally seven days) after delivery.
Prompt cash period allows them to examine the goods and check the invoice to certify its corrections
b. Deferred payments
This means that goods or service are not paid for in full on delivery. They are instead paid in future in a lump sum or in several instalments.
The period within which a buyer is supposed to pay the seller is referred to as credit period and is expressed in terms of days.
Terms of payments in credit transactions are usually agreed upon by the seller and the buyer depending on;
Forms of Deferred payments (credit payments)
a) Open trade credit/open credit
Under these forms, goods and services are sold to the buyer who is expected to pay for them at a future date or within a given period
The buyer may also be required to pay for goods or services on installments.
Discounts may be allowed to encourage the buyer to pay on time.
The ownership of the goods passes to the buyer immediately after entering the contract. The seller should however ensure the buyer will pay by:
Factors to consider when giving credit
Examples of open trade credit
i) Simple credit(prompt cash/personal credit)
ii) Monthly credit
iii) Budget Accounts
iv) Trade credit
v. Credit card facilities
Examples of companies that issue credit cards include; Barclays card, American Express, Access cards and Visa cards.
Advantages of credit card
Disadvantages of credit cards
b) Hire purchase
To Hire: Means to use someone else’s property for a payment
Hire purchase: Is a method of hiring property with an option to buy.
The term of payment for a hire purchase are;
The buyer can only possess the commodity but not own it. Therefore the buyer cannot sell the goods to another person before all installments are paid
Ownership of the goods remains with the seller. The goods are ‘on hire’ to the buyer.
After completing the payment (after the last installment has been made), a certificate is issued to the buyer as proof of transfer of ownership
In case the buyer fails to make payment/defaults in payment; the seller can repossess the goods. However if the buyer has paid two thirds of the total/hire purchase price at the time of defaulting, the seller has no legal right to repossess the goods.
The seller can only recover the remaining amount of money through a court action
The seller must display both the cash price and the hire-purchase price on the items to enable the buyers to decide under what terms they want to buy the goods.
A written agreement has to be entered into by both the seller and the buyer. The agreement safe-guards the intervals of all of them
Examples of hire purchase businesses operating in Kenya include; Africa Retail Traders (ART), Kukopesha, Singer and Amedo.
For salaried people, the hire purchase has introduced a system where the installments are deducted directly from the buyer’s salary every month. This is called the check-off system. In this system, no deposits/down payments are required. The buyer’s employer takes up the duty of remitting the deposits to the seller on a monthly basis.
Advantages of Hire purchase To the buyer
Advantages of Hire purchase to the seller
Disadvantages of Hire purchase to the buyer
Disadvantages of Hire purchase to the seller
c. Installment Buying/credit sale(deferred payment)
In this form of credit selling, the buyer is not required to pay a down payment. Payment for the goods is made in equal installments spread over a period of time. These installments cover interest and related costs of selling.
Other features of installment buying
Business Studies Notes Form 1 - 4