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Trade credit allows sellers to extend credit terms to customers, with benefits for both parties including access to products at reasonable prices and the opportunity to build customer loyalty. For customers, trade credit can be easier to obtain than bank loans or credit cards, but interest rates may be higher. Suppliers can make more money on purchases and retain customers by extending credit. It’s important for both parties to ensure the terms of credit are workable and compliant.
Trade credit is a situation where a seller or supplier chooses to extend some type of credit terms to a customer. The exact credit structure may include liberal terms that allow customers to secure goods and services immediately with up to 90 days to settle the outstanding balance, or involve the extension of a revolving credit with a maximum limit that the customer can pay off making at least minimum payments for each accounting period. The benefits of trade credit apply to both the seller and the customer, including the ability to obtain products at a reasonable price and interest rate and the opportunity to build a loyal customer base who are more likely to consider the seller’s offerings before looking elsewhere for products deemed necessary or desirable.
For the customer, the various benefits of trade credit can be very useful when it comes to financing the purchase of various goods and services. Depending on the terms associated with the credit agreement, the interest paid and overall repayment terms may be higher than financing purchases with bank loans or credit cards. Additionally, trade credit is often easier to obtain than a bank loan or credit card, making it ideal for a company recovering from a series of financial reversals to begin rebuilding the company’s credit rating.
Suppliers and sellers also reap the benefits of trade credit granted to their customers. This approach allows the seller to make a little more money on purchases, as interest can be charged under the terms of the trade credit agreement. Conversely, if the customer uses other means of payment, no interest income is generated. Additionally, taking the risk of extending a minimum credit limit to a customer recovering from past financial circumstances can help customer retention which results in more orders as the customer regains a strong financial footing. That loyalty often results in doing business with the salesperson who was there during the tough times rather than shopping from another salesperson who wasn’t willing to take a chance on the customer.
While the benefits of trade credit extend to both buyer and seller, it’s important to ensure that the terms of such credit are workable for everyone involved. Suppliers should set credit limits at levels that are in line with the risk involved, while customers should read and understand all terms and conditions that have to do with extending that credit, and be sure that compliance of such provisions is not only possible but also probable. This way, each party has a better chance of enjoying the benefits of trade credit without having to deal with any of the potential liabilities.
Smart Asset.
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