Following are cost of offering credit to customers.
1.1 Loss of interest income
Loss of interest income is the loss of interest that could be earned by investing cash in interest bearing securities during the credit term.
1.2 Impairment loss
Impairment loss is the loss incurred due to default by the customer or customer failing to pay debt at all such as due to bankruptcy.
1.3 Follow up cost
Follow up cost is the cost of administering account receivable such as creating credit policy, establishing credit limits for individual customer, preparing receivable age analysis, corresponding with customers and taking legal action in extreme cases.
1.4 Factoring cost
Factoring cost is the cost of outsourcing sales ledger administration to reduce or eliminate the risk of default by customer for a percentage of fees charged by factor. Factor is a financial institution such as bank that provides factoring services.
2.1 Increased Sales
Offering credit to customers help boost sales by allowing customers to pay later.
In case of Business to Consumer sales, consumers may have need for the product but do not have money to pay for. However, s/he can pay from following month salary.
In case of Business to Business sales, retailer may have demand for the product in his/her store but do not have money to buy. However, s/he can pay after selling the product for profit.
2.2 Increased Goodwill
Offering credit on sales increases goodwill among customers. Customers may choose a supplier among several suppliers for an standard product who provides generous credit terms.