1. SECTOR RETAIL
JOB ROLE SALES ASSOCIATE
QP CODE RAS/QO104
TOPIC PROCESS OF CREDIT APPLICATION
NAME OF THE AUTHOR RAJORSI PANJA
2. Unit 2: Process of Credit Application 1
Session 1: Features and Conditions for Credit Sales 2
Session 2: Credit Checks and Getting Authorisation 6
Session 3: Processing Credit Requisitions 9
Session 4: Techniques for Determining Creditworthiness 11
3. Process of Credit Application
Definition Retail Credit
1. A retail credit facility is a method of financing—essentially, a type of
loan or line of credit—used by retailers and real estate companies.
2. Retail credit facilities can be business-to-business, as in a company
obtaining financing from a bank.
3. Retail credit facilities can also be business-to-consumer, in which the
retailer extends credit to customers for purchases—usually big-ticket
Consumers and businesses have a growing number of providers to choose from
when seeking credit. Credit application processes are increasingly becoming
faster and more automated as new financial technology systems emerge in the
4. Session 1 : Features and Conditions for Credit Sales
According to Joe Kerr
A credit sale is an agreement between the buyer and seller stating that the purchase of
goods will be possible with a condition that the payment will be made certainly around a
specific period in future, or made with instalments
According to Pat
It is a sale of a good without cash but with an agreement between a seller and the buyer for
a later date.
Purchases made by a consumer that do not require a payment made in full
at the time of purchase.
Characteristics of credit sales :-
Credit sales are a way that businesses can offer customers a payment deferral
option for a short period of time. Some characteristics are given below:-
1.credit sales are types of credit arrangements that defer payments for goods to a
2.credits sales are the duration the credit is offered and the collateral used to back
3.Credit sales are typically of shorter duration
5. Credit sale agreement :-
A credit sale agreement means an agreement for the sale of goods in which the whole or part of
the purchase price is payable by instalments, whether the agreement is absolute or conditional.
Structure of a credit agreement :-
Retail customer credit agreements will vary by the type of credit being issued to the customer. In
many cases, the terms of a credit agreement for a retail lending product will be provided to the
borrower in their credit application. The main motto is to access the greater
number of consumer to a retailer’s goods.
Repayment terms of credit facility :-
They include the interest rates and date for repayment, if a term loan, or the minimum payment
amount and recurring payment dates, if a revolving loan. The agreement details whether interest
rates may change and specifies the date on which the loan matures, if applicable.
Conditions used for sale of goods on credit :-
A contract for the sale of goods is a legal contract exchange the goods and service or property
from the seller to the buyer and the price is payable at a later date.
Agreement to sell :-
When the transfer of ownership is to take place at a future time or subject to some condition to
be fulfilled later, the contract is called an agreement to sell
6. Essential elements of contract of sale :-
There are various essential elements which are enumerated below:
1.Essential elements of a valid contract: A contract for the sale must
satisfy all the essential elements necessary for the formation od a valid
contract., e.g., the parties must be competent to contract, there must be
free consent, there must be a consideration, the object must be lawful
2. Two Parties: Another essential element of a contract of sale is that
there must be two parties to the contract of sale, e.g., seller and buyer
3. Transfer of property: Transfer of property from the seller to the buyer. It
is necessary to determine the prices moment of time at which the
ownership of the goods transfer from the seller to the buyer.
4. Goods: There must be some goods as a subject-matter. Goods must be
one which is defined as goods in Sec 2(7) of the Sale of Goods Act. As per
the definition given in Sec. 2(7) of the Act, goods means every kind of
5. Price: Another essential element of a contract of sale is that there
must be some price for the goods. That means, the goods must be sold for
some price. According to Sec. 2(10) of the Sale of Goods Act, the term
price means “the money consideration for a sale of goods“.
7. Difference between Condition and Warranty :-
Condition is a term which is essential to the
main purpose of the contract.
Warranty is only a collateral term. It is
subsidiary to the main purpose of the
Breach of a condition gives the aggrieved
party a right to repudiate the contract.
It is also creates a right to get damages.
Breach of warranty entitles the aggrieved
party to claim damages only.
A breach of condition may under certain
circumstances, be treated as a warranty.
But a warranty cannot a condition.
If a condition is broken there arise a right to
treat the contract repudiated-Sec. 12(2).
A breach of warranty gives rise to claim for
damages but not to a right to reject the
goods and treat the contract as repudiated.-
8. Session 2 : Credit Checks and Getting Authorisation
The overall objective of a retail store is profit making. It is imperative that we have to
understand the target customer. Before giving credit your prospective lender is likely to run a
“credit check.” This means that they‟re looking at your credit history to determine if you‟re
capable to repay the credit amount. This will be reduce the loss or bad debt for business .
Meaning of credit check :-
Credit check is an evaluation of borrower‟s ability to repay the loan with timely interest
payments. Retailers have to verify the customer either they have repaying capacity or not before
giving credit facility.
Need for credit checking :-
Most important is to determine the “DEFAULT RISK” . Some points are furnished below :
1.The most important reason is either the customer have repaying capacity or not.
2. Whether lending for 30, 60 or even 90 days, your cash flow can suffer greatly when customers
are late to pay.
This lack of cash flow can impact on other areas of your business and slow your trading down
Positive credit reporting :-
Positive credit reporting is now mandatory in retail sector, positive credit information on credit
histories is mandatory for all credit providers. This is intended to allow lenders to better assess
risk using a fuller picture on potential borrowers. 6
9. Legal and company procedures for getting authorisation:-
Every customers credit history is a private, so every retail firm need to take permission from
customer before any legal processing for information.
How to get credit report :-
Credit reports can be purchased from any of the three main credit reporting agencies
(Experian, Equifax or Trans Union).
Steps to follow before granting credit :-
It can be done by a variety of techniques such as fundamental analysis, trend analysis, etc.
Fundamental analysis includes analysing various ratio such as:-
Coverage ratio, Liquidity ratio, Leverage ratio etc.
This rating depends on many factors like debt to value ratio of the borrower, current income
range, borrower‟s FICO credit score, current status of past debts taken by the borrower, etc.
Procedure for credit check on a prospective customer :-
Before giving credit to a customer credit check is most important. In a retail sector before
issuing credit a application will be filled by customer , here are some important information
collected from customer, the points are given below.
(a) Release of information (b) Signature (c) Address (d) Employment
10. Few steps are furnished below:-
1. Create credit policy :-
Are used to determine which customers are extended credit and billed.
Set the payment terms for parties to whom credit is extended.
Define the limits to be set on outstanding credit accounts.
Outline the steps or procedures used to deal with delinquent accounts.
2. Customers must complete the credit application :- Appropriate information should be
provide by customer.
3. Check the customer’s references :- Ask to customer for list of reference.
4. Run credit check: Any type of loan or outstand payments is running about customer.
5. Request personal guarantee from customer :- It‟s an guarantee to pay the bill ,not
necessary in retail sector.
6.Take security interest in products :- If a customer is unable or refuse to pay the credit
amount retailer should charge security interest.
7.Set credit limits and payment terms :- A credit limit will be set from the retailer to the
customer, how much amount customer will have to use in every month.
11. Session 3: Processing Credit Requisitions
Request to purchase goods and services, requisition is a formal request for obtaining a product or
service, typically initiated by a business. For availing credit facility requisition is made from
buyer to seller for purchase goods or services is a credit requisition.
Credit requisition :-
Requires a customer to pay his or her bill in full when it is due, and allow a customer to charge
item and bill monthly on the basis of the outstanding. Before giving credit always retail firm have
to check the credit score of a customer, credit limit depends upon credit score.
Credit requisition need some information:-
(a)Desired items or services: collects information about the desired items or services on
credit from retail store.
(b)Possible vendors to fulfil order: Provide a vendor or a list of vendors who might provide
the goods or services being requisitioned.
(c)Any budget quotations or proposals received: Vendors details information must be
(d)Delivery instructions: Contains information about the final delivery and central receiving
(e)Capture initial capital details: In credit requisition initial capital must be need.
(f)Contact information: Buyer need to provide contact details.
(g)Related accounting detail: Accounting information needed for credit requisition.
12. Process of applications :-
A credit review process is needed to ensure that a business does not grant credit to customer
who are unable to pay. The credit department handles all credit reviews.
1. The order entry department sends a copy of each sales order to the credit department. If
the customer is a new one, the credit manager assigns it to a credit staff person. A sales
order from an existing customer will likely be given to the credit person already assigned to
2. If the customer is a new one or has not done business with the retail firm for a considerable
period of time, send them a credit application and request that it be completed and returned
directly to the credit department.
3. Based on the collected information and the company’s algorithm for granting credit,
determine a credit amount that the company is willing to grant to the customer. It may also be
possible to adjust the credit level if a customer is willing to sign a personal guarantee.
4. If the company uses credit insurance, forward the relevant customer information to the
insurer to see if it will insure the credit risk.
5. Create a file for the customer and store all information in it that was collected as part of the
credit examination process.
13. Session 4: Techniques for Determining Creditworthiness
It is done to see the credit worthiness of the issuer. Credit analysis is also done by
the lender before giving a loan. It can be done by a variety of techniques such as
fundamental analysis, trend analysis, etc.
Fundamental analysis includes analysing various ratios such as
Leverage ratios etc.
Meaning of ‘creditworthiness’
Creditworthiness is how a lender determines that you will default on your debt obligations, or
how worthy you are to receive new credit. Your creditworthiness is what creditors look at
before they approve any new credit to you.
How can customers improve their credit score
There are several ways customer can improve credit score. The most obvious way is to pay
bills on time. Make sure customer get current on any late payments or set up payment plans to
pay off past due debt. Pay more than the minimum monthly payment to pay down debt faster
and reduce the assessment of late fees.
14. Techniques used for determining creditworthiness of customers :-
When a retailer want to expand business they have to grow up with credit customer. Below are
the guideline followed by the retailer is „The Six C‟s of credit” which are furnished below:
i) Character: Creditors look for people who are trustworthy and have a sound record of
ii) Capacity: This is the ability of individual to honour the credit and involves the individual‟s
iii) Collateral: The item that is pledged by the individual as security
iv) Conditions: These include the economic and regulatory conditions for the loan
v) Credit: This is the past credit history of the borrower
vi) Capital: This includes the amount of loan taken by the borrower.
How to check customer’s creditworthiness :-
The three prominent credit reporting agencies that measure creditworthiness are Experian,
Trans Union, and Equifax. Lenders pay the credit reporting agencies to access credit data on
potential or existing customers in addition to using their own credit scoring systems to grant
approval for credit.
(a) Require a credit application: Every customer should fill-up the credit application form.
(b) Check publicly available information: Before issuing credit retailer should check
(c) Use credit evaluation tools: To calculate customer creditworthiness retailer muse be use
credit evaluation tools.
15. Reference Books
Barry Berman and Joel R.Evans. Retail Management a Strategic approach,
Prentice Hall of India Private Limited, New Delhi,2002
Arun Kumar Sen and Jitendra Kumar Mitra. Commercial Law and Industrial
Law, The World Press Private Limited,Calcutta,1999
M Y Khan and PK Jain, Financial Management, Tata McGraw Hill Education
Private Limited, New Delhi,2012
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