Functions of Credit
Companies also use long-term credits. The major form of long-term credit is bonds. It is usually used by large companies. Under bonds, there are other forms. One of the most common is debenture. It is secured by the general property of the company and not by just any particular property. It is therefore important that the company must make sure that they can meet the requirements or pay under the given time. This kind of credit is not easily given buy lenders.
Only large companies with high credit ratings are able to issue debenture because it is based on the earning power of the company to meet the payment and the net interest. Other types of bonds are subordinate debentures, mortgage bonds, and income bonds. Subordinate debenture rank next to debenture when it comes to the claim to a company’s asset. Mortgage bonds are secured by buildings and land. Unlike debenture, the company use specific asset as security or collateral. Income bonds are unique because the interest is only paid when it is earned (Pritchard, 1977).
Companies extend credits to three types of costumers. These are other business firms, individual costumers, or government units. One way that individual consumers gain credit is by the use of credit cards. This is one of the most popular to the consumers today. But it is only from the consumers’ point of view that the retailer extends credit to them. After the submission of the credit invoice, the bank immediately pays the retailer. Therefore, the retailer does not actually extend the credit. There is no investment that the retailers apply in the transaction (Schall ?
Need essay sample on "Functions of Credit"? We will write a custom essay sample specifically for you for only $13.90/page
Haley, 1986). Aside from all the classifications given, credit can also be categorized into two. There is the open-end credit. In this type of credit, the consumer pays an earlier purchase and still can continue to buy things. A receipt is given after every transaction. The amount of balance differs every month. Credit card is an example of open-end credit. The other type is close-end credit. This is usually done in purchasing expensive products. The balance or the amount paid is the same every month and there is no receipt given in every transaction (Harrison ?
Torres, 2005). Functions of Credit It is generally believed that borrowing money is the essence of credit. But the true importance of credit is the delaying of payment so that the consumer can enjoy something in advance of the payment and distributing the national real income. If something of great value, say house, is to be purchased but there is not enough money to do so, one option is to save money until the amount of the house is reached. But this would take a long time, may be years, to complete.
At the time that the house is bought, the length of the time that the owner could enjoy his new house can be not very long. But by using credit, the house can be bought before the full payment is given and so the owner can enjoy the house longer (Mueller, 1951). Credit also serves functions to the company. One of the goals of an organization is value creation. This value creation is not only for the costumers but also for the employees. Credit can provide this value creation and can also develop competency of the organization (Goliath, 2003).
Credit plays a big part in the life consumers. It is always part of the managing a company. It is usually done buy companies for further development. There are many kinds of credit that a company can choice from. The choice of the company depends on the purpose the credit is needed and the financial status of the company. There are also credits that are not under the control of the company and cannot be eliminated since it affects the relationship of the company to its employees.
it is also a big help to the consumers that do not have enough money to purchase something. While there are people that cannot purchase something in a hurry, credit will always be used.
Block, S. B. ? Hirt, G. A. (1994) Foundations of financial management. 7th ed. Richard D. Darwin, Inc. , USA. Brigham, E. F. (1991) Fundamentals of financing management. 6th ed. Dryden Press, USA. Brigham, E. F. ? Gapenski, L. C. (1997) Financial management, Theory and practice, The Dryden Press, USA.