Today, nearly 90% of world trade relies on some form of trade financing. Because of this, trade credit has now become an essential tool for businesses that want to conquer new markets and build long-lasting commercial relationships. Businesses are leveraging their merchant relationships to get better finance for their business operations.
What’s more, trade credits have proven to be a better alternative to bank credit because the repayment amounts are lower. They don’t need any upfront payments and have lower interest rates. As a result, this credit facility is commonly used for operating supplies of goods and services.
Now, to know more about trade credit and its advantages for businesses, read the blog.
What is trade credit?
When one company extends a line of credit to another for the purchase of goods and services, this is known as trade credit. Trade credit greatly improves the ability of importers and exporters to trade internationally by providing funding and assisting in the mitigation of the risk of payment default in goods or services. As a business, you can offer this credit facility to other businesses as well as can take advantage of the trade credit facility provided by others.
Under this mutually beneficial arrangement, customers are able to buy goods on credit, and suppliers can attract more customers by not demanding cash upfront. Due to this, the benefits of trade credit vary depending on whether your business is the buyer in the agreement and is using trade credit or a supplier of trade credit. So, we have pinned down advantages of trade credit for you to understand better:
- Assisting new businesses to get off the ground
New businesses that are unable to raise capital or get business loans but need stock quickly can benefit from this credit facility. Small businesses, however, can be hampered by a lack of trading history, making it difficult to obtain trade credit.
- Gain a competitive edge
Purchasing products on credit as needed gives businesses an advantage over competitors who have to pay upfront. Using trade credit allows businesses to be more adaptable to market demands and seasonal variations, ensuring that they have a steady supply of goods even though their finances aren’t in good shape.
- No cash needed upfront
Buyers will stock up in time for peak demand, such as placing larger orders to take advantage of key seasonal sale times like Christmas, when they do not need to pay cash upfront. This is where trade credit comes in handy. It is beneficial because cash flow may be low following slower months, potentially preventing enough stock to be purchased for peak selling times.
- Boosts business growth
Consider trade credit to be a no-interest loan. It’s one of the most effective ways to keep cash in businesses, giving them free access to working capital. When compared to arranging a short-term loan, there is less paperwork. Instead of spending cash reserves on inventory, businesses can successfully sell products on behalf of the supplier and profiting from it.
- Easy to organize
Trade credit is fast and easy to use because there are few formal arrangements or negotiations to complete. Because of this, the agreements are usually simple to set up and manage if businesses have a good credit history, meet a supplier’s criteria, and make regular payments.
- Discounts and bulk buying
Suppliers may offer enticing discounts to trade credit customers who pay on time, making it an effective way to obtain a discount. Discounts or exclusive access to goods and services may be offered to companies with a good trade credit history, particularly for bulk purchases.
- Diminished Bankruptcy Risk
Debtors deferring payments and challenging creditors can have a negative impact on a business. Nonetheless, trade-related credit facilities can alleviate this pressure and help businesses avoid the problems that come with these risks.
- Improved Sales
In a competitive market, trade credit acts as a promotion from the supplier’s perspective. The more trade credit terms are liberalized, the higher the profits will be. Thus, the terms of credit and the sales generated by the supplier have a direct correlation.
- Increased Margins
It is self-evident that the credit offered by the supplier is not a gift to the buyer. The cost of extending credit is reimbursed by the higher prices charged by the supplier. So, it’s a win-win situation for both the buyer and seller. On the other hand, buyers are content to pay a little more if they don’t have any cash on hand. Almost no businesses run entirely on cash.
In the end, it would be wise to look at the advantages of trade credit before forming any decision.