What’s trade credit?

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Trade credit is a company’s ability to obtain goods and services from a supplier with the promise to pay in accordance with agreed terms. It also includes securing bank loans and protecting business credit for continued growth.

Sometimes called trade credit or trade lending, trade credit has to do with a company’s ability to obtain goods and services from a supplier. Trade credit is extended with the understanding that the company promises to pay the supplier in accordance with the terms and conditions agreed upon by the buyer at the time of purchase.

The range of goods and services covered by the trade credit concept extends beyond supplies and similar types of purchases. Commercial credit is also about securing bank loans. When looking for a bank loan from a qualified lender, there are a number of different factors in determining the level of credit that will be extended. Among these factors are the current value of equity held by the applicant, the current ratio of cash assets and outstanding debt, and the value of assets that could be easily converted into cash or used as collateral for the loan. The corporation’s credit history will also be taken into consideration. Once the financial profile is complete, the lender will determine the amount of business credit that can be extended to the corporation.

Protecting business credit is one of the most important tasks facing modern businesses. The ability to obtain financial assistance or secure goods and services that enhance a company’s operation is the foundation for continued growth in many industries today. Failure to maintain a good financial standing will result in the credit length being diminished and in some cases may lead to the creditor revoking the lien altogether.

Judicious use of trade credit ensures that a company has resources to fall back on when a temporary drop in sales occurs or when an opportunity arises to expand operations to take advantage of changes in the market. Under the right conditions, businesses can prosper, increasing their business credit rating in the process.

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