What is Trade Credit?
Although trade credit applies to both individuals and businesses, it is mostly associated with businesses and their relationship with suppliers. As an overview, trade credit is an agreement between two parties engaged in business to allow the exchange of goods and services without paying money upfront. It can be a business enabling a customer to pay for their purchase for an extended period, or a supplier willing to provide materials and equipment to businesses without immediately asking for an exchange of money.
The duration of trade credits varies depending on the agreement between the two parties involved. It can be 7 days, 30 days, 60, days, or even more. Usually, trade credit durations depend on the type and value of goods or services offered. More expensive items typically mean more time allotted for payment. However, it depends upon the allowable payment period of the supplier and the preferred payment schedule of the customer.
In a way, trade credit is a form of short-term debt without interest. There may be provisions about a certain discount if you pay within a specific period, or a per cent increase on the item cost if the payment gets delayed. For example, you might be able to acquire a 5% discount on the item you purchased with 3 months to pay if you pay the full amount within 7 days. However, being late on your payment can lead to a 5% increase on the initial amount or an interest rate moving forward.
Pros of acquiring trade credit for your business
If you are deciding between using trade credit for your business or not, you should know the advantages of utilising trade credit as a financial tool:
o No need with pay with a large amount of cash upfront
When you use trade credit to purchase new equipment for your business, you won’t need to part with a large amount of capital immediately.
o Competitive edge over rival businesses
Some of your rivals may not be able to use trade credit for their businesses, making them fall short when it comes to the quality of equipment and amount of money circulating in their business. With trade credit, you will be able to adjust more quickly to market demands and offer better deals to your customers.
o Improvement of a business’ credit history
You may think that using trade credit can hurt your credit history, but making consistent payments improves your financial reputation. With trade credit, financial entities will be able to see that you are financially responsible on an individual level and the corporate level. This gives them the confidence to lend a more massive amount to you in the future.
Of course, dealing with trade credit also has its risks. You can acquire a more significant amount of debt if you are not able to pay your dues on time, and it can even accumulate interest over time. From a business standpoint, you can have cash flow problems as well if you allow your customers to purchase items using trade credit. Before you enter into a trade credit agreement, you should look for alternatives to see if this option is the best match for you.
Trade credit requirements
Are you interested in getting trade credit for your business? Here are some of the requirements you may need if you want to take advantage of this type of service from your partner company:
• Credit history
• Current credit rating
• Proof of income/ financial statement
• List of existing assets
Of course, the requirements may vary depending on the supplier you approach. However, these documents will most probably be the central reference point of creditors before allowing you to take further trade credit loans.
Build a successful business with us
If you want to know more financing options for your business, you should approach us and see what we can do for you. As experienced moneylenders and creditors, we know how that the best way to ensure a mutually-beneficial business relationship is always to offer fair interest rates (if necessary), a fast approval process, and a funding range to match the needs of our clients.
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