A trade credit, also called a trade or trade credit, is basically an agreement between trading partners. In practice, this agreement means that you agree to defer the payment deadline for the purchased goods or services. There are no legal regulations specifying the repayment date of the trade credit. All terms of the trade credit and the due date are set by the parties individually. The loan period is determined depending on the quantity and value of the goods, as well as the possibilities of both parties.
It can last from several days to several months, however, most often a deferred payment of 30 days is used. In many cases, you do not need to sign a contract to get a trade credit. All you need is a confirmation, which can be an invoice or bill with a note about deferred payment. Trade credit terms vary. In some cases, the seller requires a certain advance payment, which is part of the total amount due and is a guarantee of payment. Other collateral used may be a pledge, surety or provision for the calculation of penalty interest for late payment.
An additional security, as well as an incentive to settle payments earlier is the so-called discount. In practice, this is a discount that the seller grants, reducing the price of the goods in exchange for quick payment. In such a situation, it depends on the customer’s decision when he pays for the goods and in what part.
How to use a trade credit?
Trade credit is most often used by small and medium-sized entrepreneurs who do not have adequate capital to settle all amounts due for goods or services. Trade credit is often more beneficial than a business loan or cash loan. It allows small businesses to operate without downtime, grow and maintain financial liquidity. The cash that an entrepreneur would have to pay for a good, materials or service can be used for other purposes. Owing to a commodity loan, the owner does not have to apply for a bank loan, which involves completing many formalities and waiting for a decision without a guarantee of success.
Trade credit – advantages
Trade credit is a beneficial solution for each party. Thanks to good deferral conditions, the lender gains and retains customers who guarantee the constant receipt of goods and services. Another advantage of trade credit is the possibility of establishing permanent, satisfying cooperation between interested companies. Commodity credit helps the supplier build a network of dependencies, and thus increase sales and profits.
Trade credit – disadvantages
Trade credit also has its drawbacks. It is associated with considerable risk, first of all, for the lender, because there is always a risk of bankruptcy or dishonesty of the contractor. Therefore, sellers who offer a commodity loan often check potential counterparties in the Credit Information Bureau or grant credit only to recipients who have only paid in cash for a limited time.
A trade credit can also pose a serious risk to an entrepreneur who misunderstands the possibility of timely repayment. Most often it is connected with criminal, rapidly growing interest and loss of trust, which is the basis for further cooperation on favorable terms. Sometimes, in the event of problems with financial liquidity, business owners are forced to look for sources of additional cash to pay off trade credit in a timely manner and do not run the risk of losing confidence. Each additional loan generates costs that may at some point exceed the current financial possibilities. In this situation, it is worth considering finding a solution that will help bring the company to a safe straightforward. One of them is a well-chosen consolidation loan.