What is Trade Credit?

Trade credit is an agreement between two business entities, in which one party agrees to purchase services or goods from the other without being required to make an upfront payment. In a trade credit agreement the supplier will specify how many days the buyer has before the first payment is due. Trade credits are often referred to as one of the largest external funding sources for small to medium-size businesses, second only to loans from financial institutions like banks and private lenders. When used properly, trade credits can be an essential component for business operation because it minimizes the amount of investment and capital needed to begin and maintain profitable endeavors. In basic terms, trade credits let businesses purchase items now, and pay for them later.

Trade Credit Terms
Types of trade credits are classified based on the amount of time the supplier gives the buyer to repay the amount due for the items. The two most popular types of trade credits are Net 10 (requires the buyer to pay for the goods within 10 days) and Net 30 (requires the buyer to pay for the goods within 30 days), however there are also Net 60 trade credits for trusted buyers that routinely accomplish high sales volume. A supplier may also give the buyer a percentage discount if they pay for the goods early (i.e. – within 10 days on a Net 30 trade credit), which is indicated by a fraction listed before the net payment date. For example, a ‘2/10 Net 60’ trade credit worth a total value of $1000 could be paid early (i.e. within 30 days), and a 2% discount would be given, so that the invoice amount would only be $980. This provides an incentive for buyers to repay suppliers as quickly as possible.

Trade Credit Application Requirements
When first dealing with a supplier that offers trade credits a buyer will have to provide a plethora of information to be approved for the application. This information includes basic information such as company name, contact information, address, and tax Employee Identification Number (EIN). The trade credit supplier will also want to know how many years your company has been in business, what trade terms you’re hoping to receive, how much annual revenue your business generates, and even trade references from suppliers that you have dealt with in the past. You will also need to provide information that allows them to check your credit score and the validity of your credit card, such as your DUNS number and credit card number. Finally, all applicants will be required to provide the signature of any authorized officer of the business. After being approved by a specific trade credit supplier, the terms and conditions of future trade agreements will be determined based on your repayment history with that individual supplier.

Tips for Managing Trade Credit
When dealing with a trade credit supplier it is best to become acquainted with the trade credit manager directly, as this may influence their decision to deal with you and offer ideal trade credit terms. Some trade credit suppliers offer special terms to businesses that are just starting, especially if your business appears to have a profitable business plan. Ideally, it is best to only apply for trade credits when you know that you’ll be able to sell the entirety of an order before the payment due date, so that you won’t have to pay money out of your own pocket to repay the trade credit. As a business owner you should constantly be looking for new trade credit suppliers to find the lowest prices and best repayment terms.

Comments are closed.