TRADE CREDIT – MUTUALLY BENEFICIAL SOURCE OF FINANCE

Firms seek ways to finance their trade to maintain cash flow. There are several ways of financing trade which way be summarized as trade credit, term loans, cash advance, export financing, purchase order finance, receivables discounting…

Trade credit appears to be the easiest and most beneficial source of trade finance of businesses.

Trade credit is an agreement between suppliers and customer to pay for goods and services at a later time rather than the time of purchase. 

Trade credit is a mutually beneficial arrangement – customers are able to buy goods and services without paying cash and suppliers can grow their sales by not demanding cash in advance.

The Advantages of Trade Credit for Buyers:

Trade Credit is a loan without interest. So, firms access to finance at no cost. It is one of the best ways to allocate working capital to other expenses rather than spending to goods or services purchased. Compared to other financing options for buyers like bank loans or credit cards, trade credit is more beneficial. If fact, it's free for buyers! 

Trade credit is easier and quicker than getting a bank credit. This is short-term finance that is relatively quick to arrange. If the company has a good credibility, it is easy to complete the negotiation with the seller.

Getting the products and services with trade credit provide buyers a competitive edge against their competitors which pay up front. Using trade credit enables buyers to order higher amounts and benefit from economies of scale.  Buyers get discounts from sellers and increase their profit margins, moreover as they can purchase higher amounts, the trade volume increase leads to business growth.

Demonstrating that the buyer purchases products and services with trade credit from other suppliers, increases the reputation of the buyer among new suppliers. 

As buyers do not pay up front, their purchasing power increase and this boosts the growth of firms.

The Disadvantages of Trade Credit for Buyers:

Trade credit is very advantageous especially for young companies as they generally do not have high amount of cash. On the contrary, it is difficult for young firms to be able to get trade credit.

Trade credit is an interest-free loan but if the buyer does not pay on the agreed time, it may be obliged to pay late payment fee. In that case, interest-free loan may become a very expensive loan.

In case of late payment, the late payment has a negative effect on reputation and credibility of the buyer.

The Advantages of Trade Credit for Sellers:

Giving trade credit enables sellers to attract new customers. Buyers which have been purchasing from other sellers can easily change their suppliers and start buying from the sellers which do not require cash up front.

With trade credit, buyers can consume higher amounts which normally they will be unable to afford. So, this will increase sales volume of suppliers and stimulate growth.

Selling with trade credit will increase the loyalty of the clients as it is a mutually beneficial trade financing instrument.

The Disadvantages of Trade Credit for Sellers:

When a seller offers a buyer trade credit, it is allowing the buyer to purchase goods and pay at a later date. This can create cash flow problems for the seller especially if the seller does not have enough liquidity. The seller has to match collection periods and payable periods accordingly.

A trade activity with trade credit runs the risk of non-payment, this can hamper the cash flow, payments and all financial position of the seller. Anyway, to foresee the risk level of the buyer, the sellers can demand credit reports prepared by competent business information agencies about the buyers. The credit reports will enable the sellers to get an insight about the buyers and measure the risk at trade relation beforehand about all their domestic and international clients.  Creditovision assures you high-quality and up-to-date business information about your new and existing business relations. To take informed decisions about your trade partners, access to Creditovision’s portal and get the best commercial credit reports from any country in the world.