Granting credit sales is particularly difficult in a diminishing market situation because the incidence of non-payment is more prevalent. However, on the other side of the coin, granting credit sales is one of the surest ways of remaining in business when there is gloom. To balance the equation, the creditor company must mitigate against the incidence of losses…

In everyday business environments, goods and services are exchanged, of which payments are not immediately received. Such sales are what are referred to as credit sales. To understand this, let us cast our minds  to various small outlets that hung on their walls, “NO CREDIT TODAY, COME TOMORROW,” in the belief that tomorrow is endlessly deferred. They are simply saying you are to pay for whatever goods or services you receive.

As much as we know that Nigeria mainly operates a cash economy, this has not entirely gotten rid of the aspiration for a “consume now and pay later” system. Having said this, we can reasonably assert that allowing credit sales is a culture in business relations that cannot be wished away.

The thrust of this article, therefore, is an examination of how the system can flourish or otherwise in diminishing market situations, i.e., in situations where there is a continuous erosion in the purchasing power of the people.

How do you sell on credit in a market where the future of participants, in economic terms, is, at best, very shaky? Or should there be no credit sales in a diminishing market condition since the uncertainty of the future becomes more significant than usual? We will consider certain factors that follow credit sales to answer these questions and others that may crop up in this discourse. Afterwards, we shall also endeavour to see how we can minimise the incidents of losses (bad debts) that may be attendant upon a diminishing market.

Why Are Credit Sales Made At All?

If we concede that Nigeria is a cash economy, then the natural question is why granting credit sales is still prevalent. The business environment has become so competitive that businesses make all efforts to have a fair share of the market. One of such attractions that are often offered is credit sales to potential customers to make them buy. In this regard, credit sales become an incentive for continuous patronage. However, it is also imperative to note that it is even more common when goods are bought for resale to a third party. It is hardly possible for an organisation to insist on total cash sales, except at the retail level. Even then, only a few products will meet such stringent conditions without a drastic reduction in turnover. I have had course to offer a “free” consultancy service to a small business started with N5,000 (five thousand naira) a few years back and cautioned against credit sales. From a follow-up, the caution only reduced the incidence of credit sales; it did not completely eliminate it. We can then say that credit sales are an essential ingredient in business life. Nevertheless, expectedly some conditions must be prevalent before credit sales are made at whatever level of operation.

Conditions for Granting Credit Sales

(1)  The Performance of Customers

Credit facilities are granted usually after a thorough analysis of the past performance of existing customers or a reasonably determined future performance of a potential customer. In assessing the performance of a customer, the issue of the mode of payment is taken into consideration in terms of like, say, weekly, monthly, quarterly, or periodically.

Apart from performance is the issue of reliability, which is measured in the conformity with agreed terms of payment. For existing customers, it is easy to determine, but not so for potential customers. In the case of potential customers, a trial period is usually given by which reliability is thoroughly assessed.

(2) The Status of the Company

The status of the company being granted credit facilities is also vital and strategic to determining the limit of credit granted to it. There is usually an assumption that some well-positioned companies are less risky to grant credit sales, depending on certain indices. Therefore, such companies have access to credit sales quickly. Besides this, a company’s area of coverage may make it attractive to receive credit sales very easily. A customer with a widespread network can make a case for the rapid turnover of goods and services in his area, as a “bride” for enjoying credit facilities.

In addition to this, some companies are strategically placed that doing business with them is seen as an easy way of penetrating the market.

(3) Traceability

Ordinarily, a business should be transacted with utmost reliability and trust. The concept of utmost trust and faith must exist at all times, but this is scarcely the case. A customer who cannot be easily traced is a risk if such is granted credit sales. Customers that are itinerant without a stable address may not be considered for credit sales. The reason for this is that in the event of default, the possibility of recovery becomes nil. For a customer to enjoy credit sales, the creditor company must be able to trace him at all reasonable times. That is why an on-the-spot assessment of a customer is usually carried out before final approval is given for credit sales.

(4) Length of Credit

Another thing that is considered before granting credit sales is the length of credit, i.e., the timing the credit will be due for payment. A relatively short time is typically preferred to that which extends into the distant future.

(5) Relationship With the Company

The relationship the customer has with the company is also a determinant for approving credit sales. It could be an already established relationship or a developed one as a result of past patronage. In this wise, the track records are looked into, and decisions are based on the fairness of the record.

Limitations of Conditions

The conditions listed above and any other the company may wish to consider also have their limitations. As cautious as the condition may be guiding the company to make the decision, these limitations can undermine the decision’s efficacy.

(1) Uncertainty About the Future of the Company Being Granted Credit

 It is difficult to predict the future with absolute exactitude. This does not rest within the confines of mortal beings, and therefore we are all prone to the error of uncertainty. A customer that has performed creditably in the past may suddenly slump into crises that it cannot overcome. It is even more pronounced in a business managed by a central figure whose death may mean an eventual business collapse.

(2) Lumpiness: Inconsistency In Accounts

Usually, the credit transactions in Nigeria suffer inconsistency in accounts occasioned by both parties’ weak and even nonexistent reconciliation. It is prevalent to find arguments between both parties regarding the correct amount of credit that is granted and outstanding. It is even said that most customers may not have any form of proper accounting, thereby making credit sales a cumbersome affair that should not have been. However, this can be solved by training the handlers of credit-related matters in the proper accounting system.

 (3) Default Information Systems

In Nigeria, our Management Information System is still at its lowest ebb. Sometimes the information is not given at all, and when given, they are scanty, making rumours thrive uncontrollably. The effect of this on credit is that it makes the adequate monitoring of a debtor’s performance very difficult. A customer may have received cash for goods sold to a third party but refused to return the same to the creditor. Those in the newspapers industry often experience this, both from the vendors and the advertising agents.

Mitigating Factors

If we agree that we cannot eliminate the incidence of credit sales, how do we mitigate against the limitations discussed above, especially in a diminishing market situation? The issue is more critical under this situation in that a blanket ban on credit sales may spell doom and cause the eventual folding up of businesses that are merely surviving.

(1)  Constant Reconciliation

Periodic and up-to-date reconciliation of accounts is an instrument that is only neglected at the peril of the creditors. The creditor must make a deliberate credit policy to reconcile its accounts with all the customers constantly. This will enable the business to monitor the performance of customers, and it will assist in determining when to discontinue credit to a particular customer.

(2) Shorter Credit Period  

It is essential that in a diminishing market condition, a shorter credit is granted. The longer the credit period, the greater the possibility of default. A shorter credit period also helps mitigate colossal loss if the credit is allowed to pile up. A credit facility of 30 days simply means you have to pay up before further credit is extended to you. A shorter credit period is also easy to monitor than a quarterly or half-yearly facility. The degree of uncertainty in one month is less than that of a quarter or half a year. A shorter period is a mitigating factor against future uncertainty.

(3) Constant On the Spot Evaluation To Receive Any Danger Signal

There is the need for the creditor to constantly monitor the debtor’s condition using the on-the-spot assessment, especially in circumstances of inefficient information systems. The on-the-spot assessment will readily enable the creditor to read any danger signal and therefore take precautionary action, both at recovery and halting of further credit. Some smart customers may hide crises and even apply for bigger credit, knowing full well the possibility of not paying back. The creditor should not wait for the house to collapse on its head but detect the structural defect, even before the building collapses. 

(4) Attractive Discounts To Encourage Prompt Payments

A creditor may use the instrument of generous discounts to abate the incidence of substantial bad debt. This is done by offering a percentage discount if debts are settled before the due date. Even a long-overdue debt can still qualify for a percentage discount if there is any fear that it may be lost. A partial recovery is still much better than a total loss.


Granting credit sales is particularly difficult in a diminishing market situation because the incidence of non-payment is more prevalent. However, on the other side of the coin, granting credit sales is one of the surest ways of remaining in business when there is gloom. To balance the equation, the creditor company must mitigate against the incidence of losses by applying the helpful tips offered above.

Bolutife Oluwadele, a chartered accountant and a public policy and administration scholar, writes from Canada. He is the author of Thoughts of A Village Boy andcan be reached through:       


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