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Types of Credit


For this assignment, you will write a 2-page research paper in which you describe the different types of credit used by your manufacturing company. In this paper, please address the following questions:
• What types of credit does the company use and how are they managed? How would you measure the different forms of debt?
• What types of credit does the company extend to individuals and businesses and how are these managed? How would you measure the different forms of credit?
• How does the company’s level of debt and credit compare to other companies within the industry?
• What changes would you recommend? How could the company improve either its debt policies, credit policies, or both?

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Types of Credit


Credit cards: This is the normal unsecured line of credit which fluctuates from time to time depending on the purchases and the consumption patterns of individual consumers. This type of credit allows for clients to purchase goods and not pay for them instantly with cash. However, payments ought to be paid within the shortest time possible – because credit cards are a short term credit methods. To ensure prompt payments, the company monitors the credit accounts of clients to ensure that none of them accumulates too much debt for an extended period of time without paying for it.

Rent-to- own plans: This form of subtle credit allows for a customer to take possession of goods, after which they are required to pay weekly or monthly installments towards settling the debt (Bhattacharya, 2004). After the customers as paid the entire required amount – usually within a period not exceeding 18 months – they take acquire full ownership of the goods in question. The credit aspect offered by this type of payments arises from the fact that a customer takes possession of the merchandise in question immediately, which paying for it at a letter date. The manufacturing company maintains tight regulation such that not one exceeds the stipulated 18 month period before paying for acquired goods.

It is worth noting that the above types of credit are extended to both individuals and businesses – though businesses normally prefer the latter because it allows for dealing with goods even before paying for them. It must be remembered that since the subject of study is a manufacturing company, credit is provided with the sole purpose of encouraging consumers to purchase goods, and not for its sake. Only financial institutions would advance credit to realize returns. Therefore, the effectiveness of the type of credit given is measures on the basis of how it boosts sales.

Given the fact that the two credit methods discussed above highly minimize risks on the side of the manufacturing company, the company maintains a lower level of debt compared with similar companies in the industry. Because of prudent lending, it is able to minimize borrowing, thus in the processes maintaining an optimal capital budget and cash balances (Berk, 2010). As a matter of fact, both form of credits make for useful assets for the company. Since the company follows due diligences in its acceptance of both credit cards as well as deciding which rent-to-own plans to accept, cases of default are rare. This ensures that the company reaps the benefits of providing goods on credit while at the same time guarding against too much debt.