Is Trade Credit Right for Your Business?

Cash shortages can make it hard for you to buy inventory and supplies that your business needs and can even threaten the longevity of your business. Most business owners will pursue trade credit when they are low on cash. With this option, you can receive the goods or services you need and pay for them by an agreed upon date.

In this post, we’ll take a closer look at this type of financing so you can determine if trade credit is right for your business.

What Is Trade Credit?

Trade credit can give you the opportunity to buy what you need from various vendors and pay them at a later time. You will have anywhere from 30 to 120 days to take care of your balance if you receive trade credit.

You might score a discount if you pay for your purchase before it is due. However, if you don’t pay your balance on time, you might have to pay costly late fees.

Trade Credit Terms

You can expect an invoice with net terms if you use trade credit. The net terms will determine how long you have to pay back the vendor. Every vendor has their own trade terms, but the following are some of the most common ones:

  • Net 30: Your payment is due within 30 days of the invoice date.
  • Net 45: Your payment is due within 45 days of the invoice date.
  • Net 60: Your payment is due within 60 days of the invoice date.
  • Net 120: Your payment is due within 120 days of the invoice date.

Your trade credit agreement should also explain what happens if you make a late payment and whether you’ll get a discount for paying off your balance earlier than the set due date. You should be aware of any payment penalties or other potential fees before taking out trade credit.

Pros of Trade Credit

The following list are pros of trade credit:

  • Relief from cash flow problems: you can still get what you need to help run your business when you have trade credit.
  • Qualifying is easy: vendors will approve you for trade credit. This is true if you have a positive track record and have been in business for a while. It does not take long to apply for trade credit and get your goods.
  • No interest: you won’t have to worry about interest or extra fees if you pay before the due date.
  • Customer satisfaction: you can ensure your customers will get what they want and keep loyal ones.
  • Positive long-term relationships: long-term relationships with vendors might offer competitive prices and terms.

Cons of Trade Credit

Be aware of these drawbacks of using trade credit:

  • Expensive: you might be stuck with expensive prices if you don’t qualify for early payment discounts.
  • Late fees: if you don’t pay off your balance on-time, you’ll be charged a late fee.
  • Credit issues: late payments can take a toll on your business credit score.
  • Damaged relationships: If you fail to make your payments on time, you can ruin your relationships with vendors

The Bottom Line

Trade credit can benefit you as a small business owner, especially if you have cash flow issues that inhibit your ability to buy the inventory and supplies you need to operate. You will get an interest- free loan that might help you avoid the traditional expenses that might come with borrowing money. If you need cash to cover anything other than inventory and supplies or need longer repayment terms, you may want to consider alternative funding options.