Credit standard means some principles that increase the selling of product and services in debt. Credit standard of a firm may be aggressive or flexible, if the credit standard is to be aggressive than the selling on cash is emphasized. It is the guidelines that a company follows to determine whether a credit applicant is creditworthy. The selling on debt is reduced contrary if the credit standard of a firm is flexible then the selling debt is to be more. It is the strategy issued by a company or firm that are used to find out if a possible borrower is creditworthy.
Factors to be considered for credit standard: Factors to be considered for credit standard are as follows –
- Level of sells;
- Collection cost;
- Inventory in receivable;
- Average collection period;
- Default cost.
Credit standards influence the quality of a firm’s customers, i.e., the time taken by customers to repay credit obligation, and the default rate. The time taken by customers to repay debt can be determined by the average collection period (ACP). There is a long list of standards, not essentially equally exclusive, that are given varying degrees of significance in judging applications for installment credit.