Economic and Marketing Information                                                                                                                                                                                          FOR INDIANA  FARMERS
Prepared by the Agricultural Staff of Purdue University, Lafayette, Indiana      
by  R.   N.   Weigle   and  J.   H.   Atkinson,   Agricultural  Economics
Throughout Indiana many farm suppliers carry large
amounts of open account credit. This open account credit
is used to purchase feed, seed, fertilizer and other farm
supplies by farmers. A recent Purdue study indicates
that many farm suppliers extend open account credit
averaging $150,000 or more throughout the year. About
two-thirds of this amount may be carried longer than
30 days.
Relatively few farm suppliers have a definite credit
policy stating the charge and terms for carrying open
accounts. In fact, many make no differentiation in the
cost of an item if cash is paid or if it is put "on the
books" to be paid 6 months later. Is this credit really
free to the farmer?
Open Account Credit Costs Someone
Whenever credit is provided there is a cost which
someone must pay. The actual cost of providing credit
may vary from one farm supply merchant to another.
However, three components of cost are almost always
present—cost of funds, risk of loss, and administrative
costs.
Whether a farm supplier borrows money or uses his
own money to carry open accounts there is a cost involved. If borrowed, the cost will be equal to the interest rate. If the money in open accounts is the supplier's
own money, then the cost is the rate of return which
could be expected if the money were invested elsewhere.
The merchant runs the risk that at least a few of his
open account customers will not be able to meet their
obligations. The magnitude of this cost depends largely
upon the care exercised in extending credit. But even
with carefully selected "borrowers," the merchant runs
the risk of some loss caused by disaster, low prices and
the like.
Open account credit is almost certain to require additional administrative costs. Additional expenditures
are generally required for postage and supplies, extra
book work and possibly salary and mileage for collection. In addition the management is likely to be involved
in decisions about credit approval, credit rating checks,
collection procedures, etc. All of this takes time. Only if
December  30,   1961
the manager has no profitable alternative for his time,
does the time spent on open accounts come without cost.
These three components of cost may range from about
4 to 12 percent of the cost of the average annual volume
of accounts outstanding. Farm supply firms that are debt
free, have little or no alternative investment opportunities within their business, practice careful credit selection
and collection techniques, and have clerical management
personnel who are not fully occupied and have little or
no alternative use for their time would have costs falling
at the lower end of the range. Thus even in the most
favorable circumstances extension of open account credit
has a cost.
How Suppliers Handle The Cost
Assume that a farm supplier's open accounts over 1
month old average about $100,000 and his annual cost
is near the low end of the range, say, 6 percent. His
annual cost of extending open account credit would be
$6,000. How do merchants recover or eliminate this cost?
A few eliminate the cost by adopting and enforcing a
credit policy of cash in 30 days. Since only "convenience
credit" (30 day credit) is extended, much of the cost
of carrying open accounts is eliminated. Some merchants