When talking about Small Business Bad Credit Loans, it is important to get an insight of the term "receivables". It can be defined as debt owed to the firm by customers arising from sales of goods or services in the ordinary course of business. When a firm makes an ordinary sale of goods or services and does not receive payment, the firms grant trade credit and create accounts receivable that could be collected in the future.
Accounts receivable represents an extension of credit to customers, allowing them a reasonable period of time in which to pay for the goods received. Credit is a key aspect of today's economy. In fact, credit is a marketing tool for sales.
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As a marketing tool, credit is intended to promote sales and thereby profits. However, credit is a risk to companies and invariably costs them money. Businesses managers should weigh the benefits against the costs ahead of time. The objective of receivables management is to promote sales and profits until that point is reached where the return on investment in further funding receivables is less than the cost of funds raised to finance that additional credit, i.e. cost of capital.
The major categories of costs associated with the extension of credit are collection cost, capital cost, delinquency cost and default cost. Collection costs are administrative costs incurred in collecting the receivables from the customers to whom credit sales have been made. The increased level of accounts receivable is an investment in assets. Delinquency cost arises out of the failure of the customers to meet their obligations when payment on credit sales becomes due after the expiry of the credit period.
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