A Guide to Trade Credit in Business
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What Is Trade Credit?
How Does Trade Credit Work
Who Uses Trade Credit
Accountants/bookkeepers Advertising/marketing agencies Construction/landscaping companies Food suppliers Restaurants Manufacturers Wholesalers Retailers Cleaning services
Pros and Cons of Trade Credit
Frees up cash Because payment is not due until later, trade credits improve the cash flow of businesses, enabling them to sell goods they acquired without having to pay for those goods until a future date. It can be a good option for companies expanding into a new market or that have seasonal peaks and dips. Possible discount Depending on the trade credit agreement, if the buyer pays the invoice within a certain amount of time, they may receive a discount on the goods or services they purchase. 0% interest The cost of capital can be a burden on some small businesses. If the buyer can settle the invoice within the agreed upon time frame, there is no interest charged on this type of financing. Short payment period The length of the trade credit payment term varies, but they are often less than 120 days, which is shorter than most types of loans for businesses. For a growing small business, this may not be enough time. Companies that need a longer repayment period may want to look into other types of debt instruments. It’s easy to over-commit With discounts and wholesale prices, it can be tempting to buy too much of a particular good. Not only does this create excess inventory, but it also creates a bigger debt obligation. Possible penalties for late payments Depending on the trade credit agreement, there may be negative consequences for late payments, such as interest or a fine. In addition, the company might report your late payment to the credit bureaus, which could damage your business’s credit score.
Beat out competitors Companies offering trade credit may be able to gain an advantage over industry peers that don’t offer trade credit. Because it can be difficult for some small businesses to get a bank loan, they may seek out suppliers offering trade credit. Develop a strong relationship with clients Offering trade credit increases customer satisfaction, which can lead to customer loyalty and repeat business. Increase sales Trade credits are still sales even if payment is delayed. Trade credit can also encourage customers to purchase in higher volumes, since there is no cost to the financing. Therefore, a trade credit can provide the opportunity for growth and expansion. Delayed revenue If your business has plenty of cash, this may not be an issue. However, if budgets are tight, delayed revenue could make it difficult to cover your operating costs. Risk of buyer default Sometimes customers are unable to pay their debts. Depending on the trade credit agreement, there may be little to nothing the seller can do other than sell the debt to a collection agency at a fraction of the cost of the goods provided. Less profit with early payment discounts If the seller offers a discount for early payment, they will earn less on the sale than they otherwise would.
Trade Credit Accounting
Trade Credit Instruments
Trade Credit Trends
3 Small Business Loan Tips
Generally, it can be easier for entrepreneurs starting out to qualify for a loan from an online lender than from a traditional lender. Lantern by SoFi’s single application makes it easy to find and compare small business loan offers from multiple lenders. If you are launching a new business or your business is young, lenders will consider your personal credit score. Eventually, though, you’ll want to establish your business credit. If you need to borrow money to cover seasonal cash flow fluctuations, a business line of credit, rather than a term loan, provides the flexibility you likely need.
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