Trade credit accounts allow customers to receive goods and services now and pay for them later. They can be structured in various ways, including simple accounts with a set payment period, revolving accounts with interest, and business lines of credit. Payment discounts and interest rates may apply.
Trade credit accounts are accounts established by vendors and vendors for the benefit of customers. These accounts allow customers to secure goods and services they require today and pay for them in the future. There are several ways to structure business credit accounts, some equipped to allow for full repayment within a certain number of days and others that include a revolving credit approach or some sort of business line of credit.
One of the most common approaches to trade credit accounts is a simple account that allows customers to receive products now and pay for those products within a certain period of time. With this arrangement, suppliers process and deliver an order, then prepare an invoice that is forwarded to the customer. Typically, the customer will pay the invoice in full within 30 to 60 days, keeping the account in good standing. Some vendors will offer discounts on invoice totals for paying the balance due within a shorter period of time, or delay applying interest on that balance if it is paid within at least 30 days.
A different approach to trade credit accounts involves setting up a sort of revolving account for the customer. With this solution, the seller usually sets an account credit limit and issues the customer with some sort of account or credit card number that can be used when placing orders. In each billing period, the customer must make at least the minimum payment required to keep the account in good standing. The customer is also free to offer payments that cover the entire outstanding balance or at least a greater portion of that balance than is covered by the minimum outstanding payment. Accounts of this type will accrue interest from one billing period to the next, which means that interest is charged on any unpaid balance in the previous period.
Trade credit accounts can also be in the form of business lines of credit. This approach is somewhat like a revolving credit account in that a specific maximum amount is set for the customer, based on credit ratings by the financial institution issuing the line of credit. Businesses can use this type of trade credit to secure funds that are used to settle operating expenses, then withdraw the balance before the end of the billing month when cash flow is received and used to settle the borrowed amount from the credit line at the beginning of the month . Commercial credit accounts of this type generally do not accrue interest if that balance is paid in full each billing month, although a fixed or floating rate of interest may be charged on an outstanding balance that rolls over into the next billing period.
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