Trade credit allows vendors to extend credit terms to customers, including liberal terms and revolving credit. Both parties benefit from obtaining products at reasonable prices and building customer loyalty. Trade credit can be useful for financing purchases, but it’s important to ensure workable terms for all parties involved.
Trade credit is a situation where a vendor or supplier chooses to extend some form of credit terms to a customer. The exact structure of the credit may include liberal terms that allow customers to secure goods and services immediately with up to 90 days to pay off the balance due, or involve extending revolving credit with a maximum limit that the customer can repay by making at least minimum payments. each accounting period. The advantages 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 that is more likely to consider the seller’s offers sooner. to look elsewhere for products that are considered necessary or desirable.
For the customer, the various advantages 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, interest paid and general repayment terms may be higher than financing purchases with bank loans or credit cards. Additionally, business credit is often easier to obtain than a bank loan or credit card, making it ideal for a business recovering from a series of financial reversals to begin rebuilding the company’s credit rating. .
Suppliers and vendors also reap the benefits of trade credit extended to their customers. This approach allows the seller to earn a little more from the purchases, since interest can be charged according to the terms of the trade credit agreement. On the contrary, if the client uses other means of payment, no interest income is generated. Additionally, taking the risk of extending a minimum credit limit to a customer reeling from past financial circumstances can help build customer loyalty that results in more orders as the customer regains a solid financial footing. That loyalty often translates into doing business with the supplier who was there through the tough times rather than buying from another supplier who wasn’t willing to take a chance on the customer.
While the advantages of trade credit extend to both buyer and seller, it’s important to make sure the terms of that credit are workable for everyone involved. Providers must set credit limits at levels that are in line with the risk involved, while customers must read and understand all terms and conditions that have to do with extending that credit, and ensure that they comply with those provisions. not only possible but also probable. By doing so, each party has a better chance of enjoying the benefits of trade credit without having to deal with any potential liabilities.
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