Trade credit allows customers to order goods and services without paying in advance. Suppliers may offer revolving credit or specific payment terms. Timely payments can help establish business credit and attract lenders. Commercial credit is also available to individuals.
Trade credits are open accounts extended to a customer by a supplier. Trade credit makes it possible for customers to order and receive goods and services without having to pay in advance. More than one open account agreement model is used today, ranging from revolving credit to simple invoicing with specific payment terms.
The most common model for trade credit is the acceptance and delivery of a customer order accompanied by an invoice. The invoice established terms of payment that the customer must accept. Typically, a customer will have fifteen to forty-five calendar days from the invoice date to make payment in full. If payment is not made within the terms, the supplier may choose to apply additional charges to the account or temporarily suspend the customer’s credit privileges.
Suppliers may also choose to establish a revolving line of credit for a customer. In this scenario, the supplier sets a credit limit based on the customer’s credit rating. The customer is free to make use of the account as long as two conditions are met. First, the minimum monthly payment is received on time. Second, applicable finance charges are paid along with the principal balance.
Establishing business credit can be a great way for a new business to build a favorable list of credit references. Timely payment of outstanding invoices will help make the business more attractive to lenders such as banks or private investors. Keeping track of business credit payments paves the way for financial assistance such as establishing bank lines of credit, obtaining business loans, or receiving favorable interest rates on mortgages for a business website.
Commercial credit is also extended to individuals. In the broadest sense, whenever goods and services are delivered and invoiced for payment at a later date, the consumer receives the benefit of trade credit. As long as payments are made according to terms, business credit can be an excellent way to help establish or rebuild a solid credit score.
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