Credit Terms and Standards in Business

The company’s credit standards are set with consideration of risk, profit margins, costs, and transactions levels. Currently, the firm applies conservative credit standards for bad and moderate accounts while good accounts receive liberal standards. The importance of this is to ensure that quality of the firm’s customers is not compromised and good clients are not pushed away by a stringent policy (Yang & Birge, 2013). The credit terms available ensure the firm’s clients receive competitive packages in comparison to those prevailing in the market for the benefit of both parties (debtor and creditor). The credit policy in place also ensures that the firm is not faced with liquidity problems and thus is able to meet its short-term obligations when they fall due given that most of its purchases are on credit.
Overdrafts and short-term bank inventory loans are among the options available for financing inventory for a short period whenever there are cash flow challenges. Since the company has maintained a healthy bank statement, it would be easy to request to request for an overdraft of two to three months at a relatively low-interest rate. The other option would be to go for a short term inventory loan with the working capital as collateral. The firm can also review its credit terms as trade credit acts as a risk sharing mechanism (Yang and Birge (2013).
A 2/10 net 30 trade discount reduces accounts receivable cycles. The cost of foregoing it is thus the cost of tied up cash for the firm due to longer than preferred receivable cycles and unsatisfied customers that would miss out on the 2% discount.

The impact of the opportunity cost is thus dependent on the liquidity status of the firm.

References
Yang, S. A., & Birge, J. R. (2013). How inventory is (should be) financed: Trade credit in supply chains with demand uncertainty and costs of financial distress. Available at SSRN 1734682.