HOME TRADE

This is the buying and selling of goods and services with an aim of making profit.

Types of Trade

1. International trade or foreign trade

This is trade between two or more countries

2. Internal or home trade

This is trade within a country.

Importance of trade to the community / society

a) It enables people to get goods and services they are unable to produce totally by buying from other
communities
b) It enables people to get a variety of goods which gives them a wide choice to choose from
c) It provides employment to many people who engage in trading activities hence improving their
standards of living.
d) It provides incomes to people hence improving their standards of living
e) It improves infrastructure in the community hence facilitating movement of goods to markets
f) It improves peace and relations among communities due to increased interaction among producers
hence avoiding conflicts.
g) It leads to sharing or copying of good cultural habits from other communities which will or can lead
to betterment of the community.
h) It enables a community to sell its surplus goods which would have otherwise been destroyed
I] It leads to production of quality goods and services due to fair competition among producers

Home trade

Divided into – wholesale trade

- Retail trade

RETAIL TRADE

Is the buying of goods in smaller quantities from wholesalers and selling them directly to consumers.

Benefits of retailers to the consumers

I.They sell goods on credit to consumers hence enables consumers to buy goods even if they don’t have
money.
II.They break the bulk and sell small quantity of goods to consumers which they require and can afford.
III.They offer advice to consumers on how to use certain goods hence making consumers to consume the
goods appropriately.
IV.They bring goods closer to consumers by locating closer to them hence save them on the transport
costs

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 V.Store goods on behalf of consumers hence consumers will get goods regularly.
VI.They inform consumers on availability of new goods through’ advertising which make consumers to
be aware of new goods in the market.
VII.Sells a variety of goods to consumers hence wider choice
VIII.They provide after sell service to consumers hence enabling consumers to save on costs such as
transport cost.
IX.They ensure regular supply of goods to consumers hence stabilizing prices of goods

Benefits to producer and wholesaler

 They provide them with information on market demand

 They store goods on behalf of producers and wholesalers
 They transport goods from wholesalers and producers
 They carry out bulk breaking on behalf of producers and wholesalers
 They relieve them from the marketing risks
 They brand, pack and blend goods on behalf of producers and wholesalers

Types of Retailers
a) Small scale retailers
b) Large scale retailers

SMALL SCALE RETAILERS

Characteristics of small scale retailers

I.They require less capital to start and maintain

II.They are usually owned by one person
III.They are very flexible
IV.They store few goods
V.They are located anywhere but closer to consumers
VI.They have unlimited liabilities
VII.Some are operated in open air
VIII.Sometimes they sell goods on credit
IX.There is no division of labor and specialization

Advantages

 They require less capital to start

 They require less capital to co-operate and maintain
 They are very flexible
 They are located closer to consumer
 They sale goods on credit to consumers
 Easy to make and implement decisions
 They sale in small quantities to consumers
 They encounter few risks
 They sell a variety of goods to consumers

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 Disadvantages of small scale retailers

I. They face stiff competition from large scale retailers as traders

II. They cannot easily get loans due to few resources
III. They encounter bad debts due to credit sales
IV. They lack enough skills to manage their business as there is no specialization
V. They have unlimited liabilities
VI. They pay taxes daily which is very expensive
VII. They are always harassed by local authority
VIII. They are located in areas with poor transport and therefore unable to get through suppliers

Types of small scale retailers

a) Without building
- Road side sellers
- Open air market
- Itinerant traders (Hawkers traders)
- Automatic Vending machines

Road side sellers

They are traders who sell their goods at fixed points along busy roads, schools or institutions

They usually sell fast moving goods

Open air market

Sell their goods in fixed markets where many people meet

They sell fast moving goods like clothing, hens etc

itinerant traders

They are traders who move from one place to another selling goods which they carry on backs, hands,
heads, bicycles and wheelbarrow

They are of two types namely:

- peddlers
- hawkers

Peddlers

They are traders who carry their goods they sell on backs, hands and heads as they move from place to
another in searching for customers

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Hawkers

These are traders who carry their goods they sell on bicycles, motor vehicles, hand carts as they move place
to place as they search for customers

Automatic Vending machines

These are coin operated machines used to sell fast moving goods and services e.g stamps

Advantages of Automatic vending machine

I.They serve customer for twenty-four hours

II.They economize spaces
III.They do not require an operator for goods to be sold
IV.They are very accurate
V.They do not sale goods on credit
VI.They reduce cost of labor

Disadvantages

 Fake coins can be used to get foods

 It is very expensive to buy and maintain the machine
 Sale few types of goods and services
 Must be supervised regularly
 Don’t sale on credit
 Cannot store many goods at ago
 In case the machine breakdown customers are convinces

b) With building

I.Single shops
II.Tied shops
III.Kiosk
IV.Canteens
V.Market stalls
VI.Mobile shops

1.Single shops

These are small fixed shops owned by one person and stores a few variety of goods

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 2.Tied shops

These are shops that sales goods at one kind produced by one manufactures e.g. petrol station

Characteristics of Tied shops

 They sale one type of goods

 Owned by the manufactures
 Financed by the manufacture
 They sale standardized goods
 Have several branches
 Supply goods by one manufacturer

3.Kiosk

These are small temporal shops located in busy places and sale fast moving goods

4.Canteen

These are shops found in institutions where many people are:

5.Market stalls

These are buildings subdivided into small selling places by local authorities called stalls.

6.Mobile shops

These are vehicles arranged in form of a sheep and move from place to place selling goods.

LARGE SCALE RETAILERS

Characteristics features of large scale retailers

I. Requires high capital to start and maintain

II. They stock large quantity of goods
III. Mainly located in urban areas
IV. They sale their goods on cash bases
V. They have buildings
VI. They enjoy economics of scale due to large scale operation
VII. They have several branches countrywide
VIII. They enjoy skilled manpower and therefore use specialized labor
IX. They buy goods direct from suppliers

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 Advantages of large scale retailers

I.They have large markets due to increase in advertising

II.Attracts many customers due to low prices of their goods
III.Enjoy economies of scale due to large scale operations
IV.They are well managed by skill workers or managers
V.They buy goods at low prices due to bulk purchasing from producers
VI.They can easily get loans due to many resources that can act collateral security
VII.They raise more capital hence easy to expand
VIII.They have enough money to buy machines for assisting them in operations
IX.The higher skilled manpower and therefore individual is placed where he/she is specialized

Disadvantages of large scale retailers

I.They require a lot of capital to start and operate

II.They are faced with many risks
III.Decision making takes long time and implementing them
IV.They are located in urban areas away from customers
V.They are not flexible
VI.They do not offer personal services to customers
VII.They don’t cater for individual test and preference of some types of customer
VIII.They do not sale on credit sales
IX.The owner lacks personal contact with customers
X.They sale goods in large quantities

Types of large scale retailers

1. Supermarket
2. Hypermarket
3. Chain stores
4. Main order firms
5. Departmental stores

1.Supermarket

These are large scale shops that stock a variety of household goods and sale them on sale service basis.

Characteristics features of supermarket

I.Goods are sold on cash basis

II.All the goods have price tags
III.Goods are sold on self-service basis
IV.Prices are fixed hence no bargaining
V.Goods are sold at low prices
VI.All the goods are displayed on shelves
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 VII.Sale a variety of goods to customers
VIII.Most supermarkets are located in urban areas

Advantages of supermarket to the buyer

I.They sale goods at low prices hence customer save

II.The customer’s picks goods they want to buy from shelves due to the self service
III.Customer’s time is not wasted on bargaining since the prices are fixed
IV.They sale a variety of goods to customers due to wider choice
V.The price tags of goods assist the customer to budget
VI.Quality goods are sold to customers
VII.Shopping under one roof saves time to customers

Advantages to the owner of the supermarket

I. Low prices attract many customers

II. Low cost of book keeping due to cash cells
III. They buy goods in bulk hence at low prices
IV. They employ skilled workers due to high capital they have
V. No problem of bad debt due to cash sale
VI. They can afford to buy machine to assist them

Disadvantages of the supermarket to the buyer

I.Encourage impulse buying

II.Sale goods in large quantities which many customers cannot afford
III.Located in towns far away from customers
IV.Do not sale on credit
V.Prices are fixed and no bargaining
VI.Do not offer personal services
VII.They stock standardized goods hence do not cater for individual taste and preference

Disadvantages to the owner

I. Shop lifting or theft of goods is commonly due to self service

II. They require a lot of capital to start and maintain
III. A lot of money is spent in installing equipment’s security
IV. Requires a lot of space to operate hence high cost of rent
V. The owner takes personal contact with customers

Reasons why most supermarkets are mainly located to towns

I. Availability of many customers

II. Availability of good buildings with enough space
III. Availability of many producers in main towns
IV. Availability of adequate supply of power
V. Availability of adequate security
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VI. Availability of skilled manpower in towns that can be hired to work in supermarket
VII. Availability of transport and communication network for easy movement of customers and goods

2.Hypermarkets

This is a large shopping Centre situated in one building or its one large building having many types of
business under different management.

Characteristics features of hypermarket

I. One building with many types of business

II. Each business has its own management
III. Each shop sells different types of goods/products
IV. The building occupies a very large space
V. They are located at the outskirts of the city and away from city centers
VI. Good access roads
VII. Ample parking space
VIII. Attractive and convenient to shop in.

Advantages of buying goods from Hypermarkets

I. A variety of goods are sold for consumer to choose from.

II. Prices of goods are low hence consumers will buy more goods and save
III. Consumers are given after sales services hence able to save
IV. Special services are offered to customers due to use of qualified labor
V. Shopping under one roof enables a customer to save on time
VI. Allows use of credit cards hence convenient to customers
VII. Other relevant information is provided to customer hence can assist them in purchasing

Advantages of Hypermarkets

I. Have large spaces

II. Sell a variety of goods for consumers
III. Hire skilled manpower
IV. Have enough space for expansion
V. Attract many customers due to low prices
VI. Easy sharing of ideas due to closeness of firms
VII. Purchase goods in bulk at low prices
VIII. No bad debts due to cash sales

3.Departmental stores

These are many shops under one roof management and owner

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 Features of Departmental stores

I. Many shops are under one roof

II. All shops are under one central management
III. All shops are owned by one trader
IV. Goods are sold on cash basis.
V. They are attractive and convenient to shop in
VI. They are usually situated in town centers
VII. They offer a variety of goods and services
VIII. They may provide services such as restaurants, reading rooms and post office.

Advantages of departmental stores

I. They employ qualified staff

II. Purchase goods in bulk at low prices
III. The store a variety of goods
IV. They sell goods at low prices
V. They have large floor spaces
VI. They sale on cash basis hence no bad debts

4.Chain stores

They are large scale retail business which has many shops and branches distributed over a country or region

Characteristics of chain stores

I. All shops have similar shop fronts

II. All shops sell similar goods
III. All shops sell goods at same prices
IV. All shops share expenses
V. All shops are under one management
VI. All shops sell goods on cash basis
VII. Stores have branches spread in various towns
VIII. Goods can be transferred to another shop for sale
IX. Purchases are centralized.

Advantages of chain stores

I. They have a wide market

II. They sell a wide variety of goods in one line
III. They store in bulk and get quantity discount
IV. Slow moving goods can be moved to another shop/store where demand is high
V. Easy to advertise their shops and goods due to similar shop fronts and displays
VI. Enjoy economics of scale due to large scale production
VII. The sell on cash basis hence no bad debts

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 Disadvantages of chain stores

I. No credit sales to customers

II. Sell one type of product e.g. only clothing
III. Needs a lot of capital to start and maintain
IV. Sharing of expenses can lead to losses without notice in some stores
V. Mainly located in major towns away from customers
VI. Lack of personal touch with customers

5.MAIL ORDER FIRMS / STORES

They are large scale retail firms which sale goods through the post office.

Features of mail order firms

I. Sell goods through the post office

II. Goods ordered through the post office
III. Payment is cash with order or cash on delivery
IV. Extensive advertisement is done
V. Have large warehouses
VI. Sell durable goods
VII. Customers do not visit the selling premises

Advantages of mail order firms

I. Save the customers time of traveling as they deliver goods to owner

II. Customers have enough time to select the goods
III. Does not require large flow spaces to operate.
IV. Employs few workers.
V. They reach customers who are far away from the shopping centers.
VI. May not require transport facilities.
VII. Total control of distribution is possible.

Disadvantages of mail order firms

I. Business is affected negatively when post office workers go on strike

II. It’s expensive to send goods by post
III. Goods can easily get damaged due to a lot of handling
IV. A lot of documentation is involved
V. Not easy for customer to determine quality of goods
VI. Time consuming to transact through the post office
VII. High cost of advertising increases the price of the goods.
VIII. Personal contact between the buyer and seller is not possible.
IX. Problems arising in the post office may affect the business eg strikes.

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 SUPERMARKET HYPERMARKET CHAIN STORES MAIL ORDER
FIRM

Sell a variety of Sell different types Sell one line of Sell a variety of
goods of goods product goods

Under one Under different Under one Under one

management management management management

One shop under one Different shops Different stores Only operate from
building under one building located in different stores
towns

Self-service offered No self service No self service Sell through post

office

Sell on cash basis Sell on cash basis Sell on cash basis Sell on cash with
order

Goods have price Goods do not have Goods do not have Do not have price
tags price tags price tag tags

Wholesale trade

This is the buying of goods in large quantities from producers and selling them to retailers in small
quantities. A wholesaler is traders who buys goods in bulk from producers and sell them in smaller
quantities to retailers

Types of wholesalers

I. Regional wholesaler – Are wholesalers who sell goods to retailers in a given region e.g. country
II. Nationwide wholesaler – Are wholesalers who sell goods all over the country
III. General line wholesalers – Are wholesalers who sale many types of goods but of the same class
e.g. foodstuffs, clothing.
IV. General merchandise wholesaler – Are wholesaler who sale many types of goods from
different areas e.g. foodstuffs, drinks.
V. Specialized wholesaler – They sale one type of goods within one line e.g. sodas only
VI. Cash and carry wholesaler – Operates like supermarkets where retailers pick goods on self-
service basis and pay cash.
VII. Truck / mobile wholesalers – wholesalers who move around in vehicles / lorries to sell goods to
retailers.
VIII. Rack jobbers –Jobbers refers to a person who buys goods from a producer or from another
country for reselling. Rack jobbers specialize in selling particular products to the other
specialized wholesalers.

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 Factors determining the number of wholesalers in an area

I. Government policy
II. The number of retailers
III. The number of consumers
IV. The availability of infrastructure
V. The cost of distribution
VI. The value of price of goods
VII. The volume of production
VIII. The weight / perishability of bulkiness of goods

Functions or Benefits of Wholesalers to producers or manufactures

I. They transport producer’s goods hence help producers to reduce transports cost.
II. They store producer’s goods hence help them to save the storage cost
III. They advertise produces goods hence help them to store on advertising cost
IV. They break bulk on behalf of producers hence saving them the cost or work involved
V. They provide producers with market information hence enabling them to plan their production
VI. They assist producers to prepare goods for resale through branding, grading hence enabling
producers to save on costs involved
VII. They relieve producers with some marketing risks and the losses involved e.g. loss, theft, damage of
goods
VIII. They provide producers with capital which they use to finance their production

Reasons why producers / manufacturers prefer to use wholesaler to distribute their goods

I. Where producers lack transport they will use wholesalers to save on transport costs
II. Where market is wide they will use wholesalers to reach many customers
III. Where the producers lack storage facilities they will use wholesalers to save on storage cost
IV. Where the government policy requires them to use wholesalers they must do so or else they will be
going against the law
V. Where the producers want to be assisted to advertise goods they will use wholesalers to save on costs
VI. Where the producer wants capital to finance his operations he will use wholesalers as they buy in bulk
and pay promptly
VII. Where the producer wants to be assisted to break the bulk he will use wholesalers to save on costs and
time involved
VIII. Where the producers require market information he will use wholesalers as they are in contact with
retailers and consumers
IX. Where the producer wants to be relieved of some marketing issues he will use wholesalers to avoid
losses.

Benefits of wholesalers to retailers

I.They sell goods on credit to retailers hence enabling them to continue with the business when they do
not have money
II.They advertise goods on behalf of retailers hence enabling them to get customers
III.They store goods on behalf of retailers hence enabling them to get regular suppliers
IV.They break the bulk hence enable retailers to get goods in small quantities that they can afford
V.They ensure regular supply of goods to retailers hence enabling them to continue with trading
VI.They sell a variety of goods to retailers which they buy from various producers

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 VII.The advice retailers how to use goods or sell goods or operate their business
VIII.They bring goods closer to retailers hence enabling them to save on costs of transport.
IX.They transport goods for retailers hence enabling them to save on transport costs

Benefits of Wholesalers to consumers

I. They advertise goods hence enable consumers know the goods existing on the markets
II. They sell a variety of goods hence enable consumers to have a wide choice
III. They break the bulk hence enable consumers to get goods in smaller quantities they can afford
IV. They store goods hence enable consumers to get regular suppliers
V. They pack blend, grade goods hence enable consumers to get good quality goods
VI. They offer advice hence enable consumers to know how to use goods
VII. The stabilize prices for consumers by ensuring regular supply
VIII. They sell quality goods to consumers which have been improved through storage
IX. They ensure regular supply of goods to consumers hence avoid shortage

Differences between wholesalers and retailers

Wholesalers Retailers

Buy goods in bulk Buy goods in small quantities

Mainly buy from producers Mainly buy from wholesalers

They sell goods on cash basis They sell goods on credit basis

They are located in markets towns They are located closer to consumers

They operate on large scale They operate on small scale

Sometimes process goods with their own Always receives processed goods
name

Elimination of a wholesaler from the chain of distribution

- It is often agreed that wholesaler should be eliminated from the chain of distribution so that
goods can be sold from producer to retailer or consumer.

Circumstances under which the wholesaler can be eliminated from the chain of distribution

a) When the goods are perishable

b) When the retailer and consumers are near the producer

c) when retailers and consumers buy or order goods directly from producers

d) When retailers buy goods in large quantities

e) When the volume of production is very low

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f) When the producer has his own retail outlet

g) When the government policy restrict producer from using wholesalers

h) When the goods produced have been prepared for sell by the producer

i) When there is stiff / unhealthy competition in the market

Effects of eliminating the wholesaler

Advantages

- Prize of goods will reduce since the cost of wholesaler is not there
- Goods are delivered faster to the buyer
- There will be minimal damages / loses of goods due to handling
- The producer will get direct feedback
- The producer will maximize profit
- The producer will compete effectively on the market
Disadvantages

- The producer will encounter high cost of transport during distribution

- Producer will be exposed to many marketing risks
- The producer will get less capital
- Producer will be forced to sell on credit hence can encounter bad debts
- The producer will be forced to carry out bulk breaking on behalf of retailers
- The producer will incur high cost of advertising expenses
- Producer will incur high cost of storage
- Producer will be forced bulk break and sell in smaller quantities to retailer and consumer

PROCEDURES AND DOCUMENTS USED IN HOME TRADE

A transaction – This refers to any business activity that involves the exchange of goods and services for
money or consideration.

Procedure involved in home trade includes:

- An inquiry is made
- Reply to the inquiry
- Ordering for goods
- Delivery of goods / supply of goods
- Payments for goods

Documents involved at every stage

1.Inquiry stage

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 1. An inquiry letter - this is a letter written by a buyer to a seller wanting to know the goods offered
for sale.
Contents of the letter

- Details of the buyer

- Type of goods sold
- Prices of goods
- Means of delivery
- Terms of sale
- Means of payment

2.Reply to an inquiry – The seller will reply by sending the buyer the following documents

- Price list
- Quotation
- Catalogue

A price list - this is a printed list showing the goods on sale and the prices

A catalogue - this is a booklet that has descriptions and pictures of the products being sold by a trader

A quotation – this is a list that shows details of a specific goods that the buyer has inquired from the seller

2.Ordering for goods stage

a).Written order or local purchase order (L.P.O.)

Where the buyer asks the seller to supply him with specific goods in written

The order can also be verbal

Contents of a written order

- Type of goods ordered

- Quantities of goods ordered
- The price of the goods
- The details of the buyer

b). Acknowledgement note

A written note that the seller sends to the buyer confirming he has received the order.

c). A credit status inquiry

This is where the seller gathers information on the credit worthiness of the buyer who wants goods on credit

The source of information the seller will gather

- The buyers suppliers

- Financial statement of the buyer
- The buyers bank
- The buyer’s traders association
- The buyer’s customers

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d). Warehouse instructions

These are instructions the seller send to his store for goods to be packed for the buyer

e). Packing note

A written note packed together with goods showing the details of goods packed

The note will assist the buyer to countercheck the goods documents

f). Advice Note

A note that alerts the buyer that the goods have been dispatched to him

3.Delivery stage

a). Delivery Note

A note signed by the buyer if he has received correct goods

b). A consignment note

A note that the transport company prepares shows terms and conditions of transport and details of goods to
be transported

Parties of the note

- consignment refers to goods on transit

- consignee refers to the receiver of goods
- consigner refers to the sender of goods

Details on the note

- Transport charges
- Details of goods on transit
- Origin and destination of goods
- Terms of conditions of transport
- The details of the receiver of goods

4.Payment stage

a). An invoice

This is a document a seller sends to the buyer requesting to be paid for goods sold on credit.

Uses of an invoice

- Has details of goods bought

- It requests for payment from the buyer
- Shows the amount to be paid
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 - It shows the discount allowed
- Used as a source document in a country
- Shows the means of document
- Provides evidence of a transaction
The initial of E.O.E. means Error and Omission are exempted

b).PROFORMA INVOICE

Used both in local and foreign trade

Functions / Uses

- Acts as a quotation send to the buyer

- Requests for payments before goods are send to the buyer
- Enables the buyer to know the amount expected to be paid
- Shows the buyer, the seller does not want to sell goods on credit
- Used by buyer to collect goods at the port

c). Damaged goods Note

Send to the seller by the buyer when he has returned/ damaged goods.

d). Credit Note

It is send to the buyer by the seller to reduce the amount on the original invoice

Circumstances under which it is issued

- When the buyer returns goods to the seller

- When the seller overcharges the buyer using wrong price
- When the seller over adds the amount on the original invoice
- When the seller requests the buyer to pay for goods not delivered
- When the buyer returns empty containers to the seller
- When the seller delivered goods to buyer than indicated on the invoice

e).Debit Note

It increases the amount the buyer should pay the seller

It is red in colour

Circumstances under which it is issued

- When the buyer does not return empty containers to the seller
- When the seller under prices the goods
- When the seller charges the buyer for few goods than supplied
- When the sellers makes a calculation error by less addition
- When the seller fails / omits to charge the buyer for some goods delivered
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f). Statement of account

A document that gives a summary of all transactions a seller has with a buyer within a given period of time
e.g. one month

Contents

- Details of goods sold on credit

- Amount a buyer owner the seller
- The terms of credit
- The details of the buyer and seller
- The discounts allowed

g). A receipt

Issued by the seller to the buyer when money has been paid for goods and services sold

h). I owe you (I.O.U)

A document the buyer sends to the seller acknowledging he owes the seller’s money indicated

Terms of payment

This refers to the ways in which the buyer uses to pay for goods and services. There are three major terms of
payments:

- Cash payments
- Credit payments
- Hire purchase payment

1. Cash payment
These refers to the payment for goods and services using cash and cheques on the spot.

Types of cash payment

Spot cash – this is where the buyer pays cash as goods and services are handed over to him

Cash with order – the buyer pays cash as he orders for goods from the seller

Cash on delivery- the buyer pays cash when goods are delivered by the seller
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 Circumstances under which a seller will require cash payments from the buyer

I. When it is a business policy to sell on cash only

II. When the seller does not know the buyer
III. When the buyer is dishonest
IV. When the credit worthiness of the buyer in unknown
V. When the seller operates a mail order firm
VI. When the seller’s capital is low

Advantages of cash payment to the seller

I. The seller will have cash to purchase more stock

II. The seller will have cash to pay for his expenses
III. The seller will not incur bad debts
IV. The seller will reduce the cost of book keeping
V. The seller will find it easy to purchase finances
VI. The seller saves time of going to look for defaulters and preparing book of account
VII. The seller’s profits will be brought back as it is not tied in debts

Advantages of cash payment to the buyer

I. The buyer establishes good personal / relations with the seller

II. The buyer will be able to budget well for his income
III. The buyer will own the goods
IV. The buyer can get cash discounts
V. The buyer will not be to court for defaulting
VI. There will be no impulse buying
VII. The buyer will buy good at fair price
VIII. The buyer will get quality goods

Disadvantages of Cash sales to the seller

I. The seller attracts few customers who have cash

II. The seller’s capital will be tied in slow moving goods
III. The seller will sell few goods
IV. Some goods will get spoiled if not sold in time
V. The seller spends more money in promoting his goods

Disadvantages of cash sales to the buyer

I. The buyer will afford few goods

II. The buyer will not afford a variety of goods
III. The buyer will not afford expensive goods
IV. The buyer will not be able to use some goods
V. The buyer will be inconvenience if he buys expensive goods
VI. The buyer will have to save a lot in order to afford some goods
VII. The buyer will save for long in order to afford some goods
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 2. Credit payment
Where a buyer gets goods and services and pays later.

Characteristics Features of Credit Payment

I. The buyer will pay at a later date

II. No security is required
III. The buyer owns the goods
IV. No interest is added on the price
V. The seller will take the buyer to court if he defaults to pay
VI. Payment is made at any future time or as agreed

Types of payments

1. Trade Credit – this is where a seller allows another trader to get goods for
resale on credit.
2. Credit sales – where a consumer gets goods for own use from a seller

Advantages of Credit sales to consumers

I.The buyer is able to use the goods before buying

II.A consumer is able to acquire many jobs
III.A consumer will be able to use the money he would have paid to finance other activities
IV.A consumer will pay when he has money hence convenient to him
V.A consumer will be able to get a variety of goods he could not afford to pay cash
VI.A consumer will acquire expensive goods and pay later
VII.A consumer is able to prove his credit worthiness and honesty by paying in time.

Advantages to the seller

I. The seller will attract many customers who pay later

II. The seller will sale more goods on credit hence high sales
III. The seller will have a high sales turnover ratio due to quick sales
IV. The seller will retain many customers who buy on credit and pay later
V. The seller will be able to know customers who are honest and credit worthy
VI. The seller will generate high profits of goods are paid for in time
VII. The seller will find it easy to sell goods that go bad easily on credit

Disadvantages to the consumer / buyer

I.It encourages impulse buying i.e. buying goods not planned for
II.If the debt is larger the buyer might not pay
III.The buyer will be taken to court if he fails to pay
IV.The buyer will come un credit worthy and dishonest if he fails or delays to pay

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 Disadvantages to the seller

I. It will lead to bad debts if the buyer fails to pay hence a loss to the firm.
II. The seller might lack capital to buy more stock
III. The seller might lack finance to pay for his daily expenses
IV. It will reduce the sellers working capital hence he will sell fixed assets
V. The seller will have to take defaulters to court which is time consuming and expensive
VI. The seller’s profits are tied in debts
VII. The sellers will waste time looking for defaulters
VIII. The seller spends more time and cash on book keeping for debtors
IX. The seller has to have high capital to finance this business

3. Hire purchase / Installment payment

This is where a buyer pays an initial deposit and the balance is paid in equal installments spread over a given
period before he owns the goods bought.

Characteristics/ features of hire purchase

I. The buyer pays the initial deposit

II. The buyer only possesses the goods
III. The buyer pays for goods in equal installments
IV. The buyer will own the goods if he completes paying all the installments
V. Interest is added on the initial price
VI. The buyer must have guarantees
VII. If the buyer fails to pay any installments the seller will repossess the goods

Advantages of Hire Purchase to the buyer

I. The buyer will start using the goods bought

II. The small equal installments are convenient to pay
III. The buyer is able to get goods he could not afford to pay cash
IV. The buyer will be able to own / require a variety of goods he could not afford to pay cash
V. The buyer will be able to own many goods
VI. The buyer knows the amount and time to pay hence budgets in advance
VII. The buyer will use the money he could have paid on cash to acquire other goods and services

Advantages to the seller

I. The seller attracts many customers

II. The seller will retain many customers
III. The seller will get high revenue of all the money is paid
IV. The seller gets high profits due to high interest charged
V. The seller will repossess the goods in case of failure to get any installments
VI. The seller will get his money from guarantees if the buyer disappears with goods

Disadvantages to the buyer

I. It encourages impulse buying i.e. buying goods not planned for

II. The price of the goods is high due to high interest charged
III. The seller will possess the goods of the buyer fails to pay any installments

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 IV. The buyer does not own goods until he completes all the instilments
V. The buyer must provide guarantors who are difficult to get
VI. The procedure of getting goods on hire purchase is long and tedious hence discourages buyers
VII. The buyer will not be refunded any money of goods are repossessed hence he looses
VIII. The installments are paid over a long period which discourages buyers
IX. The initial deposit is high for some buyer to afford

Disadvantages to the seller

I. Repossessed goods are sold as second hand

II. The seller requires high capital to run the business
III. If the seller repossesses the goods unfairly he will be sued in court
IV. The seller will encounter bad debts if the buyer and guarantors fail to pay
V. The many conditions required scare away many customers
VI. The high deposits and interest scare away many customers
VII. The seller spends a lot of time and money on bookkeeping
VIII. The seller faces stiff competition from other firms that sell the same items at low prices

Factors a trader will consider when selling goods on credit to a buyer

I. The value of goods to be sold on credit

II. The income of the buyer
III. The duration of payments
IV. The policy of the business
V. The honesty of the buyer
VI. The duration the seller has known the buyer
VII. The credit worthiness of the buyer
VIII. The seller’s intention of attracting customers

Differences between the purchase and credit payment

Hire Purchase Credit sales

Initial deposit is required No initial deposits required

Guarantors are required No guarantor required

Equal installments are paid over a given Money is paid at one agreed time
period

The seller own the goods The buyer owns the goods

Interest is added on the price No interest added to the price

Used in selling durable and expensive Mainly in selling consumers goods that
goods have low prices

Goods are repossessed if the buyer fails to The buyer is taken to court if he fails to pay
pay

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 Mainly documents involved Few documents are involved

MEANS OF PAYMENT

This refers to various ways used to pay for goods and services bought

Common means of payment offered by banks

1. Cash payments
2. Personal cheques
3. Standing orders
4. Travelers cheques
5. Credit transfer
6. Bankers cheques
7. Electronic funds transfer

Means of payments through the post office

a. Money orders
b. Postal orders
c. Postage Stamps

Other means of payments

Bill of exchange

Promissory notes

1. CASH PAYMENTS
This is where the buyer pays cash to the seller

It involves the use of mobiles cash payments

2. PERSONAL CHEQUES
Cheques written by current accounts holders and given to payers who will deposit on their account or cash
them across the counter

A cheque is a written order form a current account holder to his bank to pay a specified sum of money to a
named person.

a) A drawer is the account holder

b) Drawee is the bank of the drawer

c) Payee is the person to cash the cheque

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 Advantages of cheques

I. They are cheaper to use in making payments

II. A copy can be kept for future references
III. A cashed cheque is an evidence of payment
IV. A cheque on large amounts can be written hence convenient to carry
V. Account holders can make payments without going to the bank
VI. They are safer than cash
VII. Saves time of counting large sums of money

Disadvantages of cheques
I. A cheque can be forgotten
II. A crossed cheque takes time to be cleared and cashed
III. The bank charges a fee for clearing the cheque
IV. The payee must present the cheque to the bank to be paid
V. A cheque can be dishonored by a bank for various reasons
VI. A cheque expires six months after being written and has not been cashed
VII. It is not convenient to use of the payees has no bank account

Circumstances under which a cheque will be dishonored

I. When the drawer is insane or bankrupt hence lacks contractual capacity

II. When the amount in words and figures are different hence the bank cannot determine what to be paid
III. When the signature on cheques differs from the signature of the bank hence bank can’t determine
aulterntially of the cheque
IV. When the drawer does not have sufficient funds on his account hence can’t meet financial obligations
V. When the cheque is stale i.e. has expired after six months
VI. When the cheque is defaced hence some details are not visible
VII. When the cheque is postdated i.e. has not reached maturity period
VIII. When the drawer instructs the bank not to cash the cheque for whatever reasons
IX. When the drawer is dead hence his transactions with bank are stopped / need to change ownership

3. Standing orders
These are instructions to the bank by an account holder to pay a specific sum of money to a named person
for a specific period

4. Bankers cheque / Bank draft

This is a cheque drawn by a bank and issued to a customer who has paid money to the bank in advance.

Advantages of banker’s cheques

I. They cannot be dishonored

II. It is cashed faster
III. It is very safe
IV. The payee and debtor do not need to have bank accounts
V. Bank cheques are low

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 5. Travelers’ cheques
Cheques issued by banks to customers who like traveling in fixed denominations

6. Credit transfer
Used to pay many customers at ago

A trader prepares a list of people to pay, indicate the detail of their banks and amounts, write one cheque and
presents the list and cheques to his bank which will then transfer the money to the nearest persons

7. Credit cards
This are cards issued by banks to customers who will use them to get goods and services on credit from
specific shops / forms

The firms are later paid by the bank when they present their bills

Advantages of credit cards

I. They are safe to use

II. They are portable
III. They enable the user to get goods on credit
IV. The user can get a cash loan from the bank using the card
V. They improve the social status of the user
VI. They enable the user to prove their credit rating and worthiness

Disadvantages of credit cards

I. High interest is charged

II. The bank can withdraw the card without notifying the user
III. They are used in few shops / firms
IV. The user must maintain an account with the bank
V. The financial status of the user must be high or favorable
VI. Encourage impulse buying
VII. Long procedures are involved in getting the card

8.Electronic Funds Transfer (E.F.T)

Where funds are transferred very fast through electronic means

9.Bills of exchange

 This is an unconditional order from a seller requesting the buyer to pay a specified sum of money for
goods sold on credit.
 The seller specifies the duration within which the buyer can pay
 If the buyer accepts to pay the signs back on the bill and features the bill to the seller

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 Discounting of a bill of exchange

The seller can take the accepted bill of exchange to the bank before maturity and will get the money less
some interest. This process is called discounting of a bill exchange. When the buyer pays the seller on
maturity he pays the bank.

Promissory notes

This is a note send by the buyer to the seller promising to pay a specific sum of money on or before a
specific date.

The promissory note can also be discounted by the seller before maturity

Money Order

This is a payment order purchased from the post office. Offer paying for the money to be send to cashiers at
the post office counter

The amount to be send is written on the order

The order is send to the payee who has to present it to the post office in order to get the money

The money order can also be dishonored under the following circumstances

I. When the payee cannot identify himself

II. When the payee is insane
III. When the order is post dated
IV. When the order is stale
V. When the order is defaced
VI. When the payee cannot identify or name the sender
VII. When the names of the payee on the order and the identify card are different

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Differences between cheques, money order, bills of exchange and promissory notes

CHEQUES MONEY ORDER B.O.E PROMISORY

NOTE

Written by the buyer Written by the buyer Written by seller Written by the buyer

It is conditional It is conditional Not conditional Not conditional

Expires after 6 Expires after six Expire after Expire after the
months from the months maturity date promised time
date written

Cannot be Can’t be discounted Can be discounted Can be discounted

discounted

Can be used to pay Used locally in Used in many Used in many

in many counters payment counters counters

Cashed by Cashed by the post Cashed by the buyer Cashed by the

commercial banks office buyers

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