Question

You are a partner in Creative Crafts, a small shop in your town’s historic district. The district attracts many tourists from nearby states as well as regular customers from town. During your first year, your monthly sales average was about $25,000.

You and your partners invested all your personal savings in the shop. Business has been better than you forecasted, but you believe that sales and profits could have been even better. You sell on a cash-only basis. Your motto has been, “In God we trust; all others pay cash.” You are wondering about continuing this policy since one in four people who comes into the store leaves without buying when told you don’t accept credit cards.

You and your partners are trying to decide how to go about offering credit to your customers, if you should at all. None of you has experience in dealing with credit, but you each have your own ideas on the matter.

Questions:

Why would you not sell on credit in the first place?

Why do you think the lack of credit caused some shoppers not to buy from you?

What alternatives for offering credit can you and your partners suggest? Which alternative do you recommend? Justify your answer.

Answer 1

Ans:

Creative Crafts decided not to sell on credit in the first place because

a) It can lead to bad debts. Bad Debt is a loss of income as well as loss of capital you have invested in buying the goods. If you keep losing your capital, it will only take a short time before you will go out of business.

b) Credit sales can lead to liquidity problems especially if you are not enjoying the same credits from your suppliers.

c) Some customers are very difficult when it comes to financial matters. They buy on credits but they do not want to be asked to pay their debts. Selling on credit to such customers can lead to a strained relationship. If you must sell on credit, do your background checks on the customers. But since most of the customers are tourists, we can’t do background checks on all of them

d) It also effect the cash flow if the money is not collected on time due to delay or default in payments.

Reasons because of which some shoppers decided not to buy from us due to lack of credit are-

a) It shows to the shoppers that the business is not yet financial stable to offer credit.

b) The absence of credit disallows the shoppers who do not have sufficient money to purchase the goods.

c) Not all who even have sufficient money want to purchase the goods on cash, they want to purchase goods on credit so that they can have the sufficient time to earn more money and they pay money on due date.

Alternatives that can be offered for offering credit:-

i. Debit cards

ii. Bank transfer

iii. Digital wallets

iv. Phone and mobile payments

v. Charge cards

vi. Prepaid cards

As per my recommendation, Debit cards should be used as the alternative because unlike traditional credit card transactions, debit cards provide additional security features that protect the merchant from fraud and returned transactions, because the funds availability are verified and payment is made directly from a bank account. The banks guarantee the funds and because there are no chargebacks, merchants are often not required to provide collateral or keep a reserve. Furthermore, accounts are validated in real-time and fraud modules scrub transactions, similar to the approval process with credit cards. In addition, debit cards often require additional security steps, such as a personal identification number (PIN) to further protect the consumer.