Page 487 - Business Principles and Management

Unit 5

18.1 Credit Principles and Practices

Goals Terms
• Describe three types of credit • merchant account • co-branded credit cards
plans used by businesses. provider • affinity credit cards
• Identify several types of financial • installment credit • debit card
transaction cards and the main • revolving credit • smart card
uses of each type.

Determining Business Credit Needs

When establishing a system for credit sales, businesses need to understand various
types of credit plans, the relationship with a credit card company or bank, the
kinds of credit cards available, and guidelines for establishing general credit poli-
cies. They must also be familiar with sources of credit information, credit laws, and
basic practices for managing customers who do not pay on time. Businesses offer
credit if they believe it will increase sales and profits while satisfying customer
needs. Consumers approach credit from the point of view of convenience, and
they buy from businesses that satisfy that need.

ACCEPTING MAJOR CREDIT CARDS

Businesses that wish to start selling on credit have several choices of credit systems.
They can (1) choose to work with a major credit card company, (2) offer their own
store credit, or (3) use credit plans developed by banks and finance companies.

ESTABLISHING A CREDIT CARD ACCEPTANCE SYSTEM Starting an operation to accept
credit cards involves a series of actions. The most common approach is to estab-
lish a relationship with a major credit card company such as Visa, MasterCard,
or American Express. Most small and medium-size businesses do not work
directly with the company but instead develop an agreement with a bank that
represents one or more major credit card companies or with a merchant account
provider. A merchant account provider is a private company that acts as an inter-
mediary between businesses and one or more credit card companies to establish
and maintain credit services. Using a bank or merchant account provider makes
it easier and faster to begin accepting credit cards. It also allows the business to
accept several major credit cards while dealing with only one intermediary rather
than developing agreements with each of the credit card companies.
To be approved to accept credit cards, a business is screened to make sure it
is financially strong enough to offer credit and has effective operating procedures
in place to process and approve credit purchases. The bank, merchant account
provider, or credit card company will need information on the business’s opera-
tions and history. It will need credit reports and financial statements to determine
if the business is a good credit risk. Companies that provide credit card services
to businesses must be cautious because too many businesses fail to handle credit
operations well. Having a successful relationship already established with a bank
will speed the process of being approved to accept credit cards.

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