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.
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.
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:
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.
The following list are pros of trade credit:
Be aware of these drawbacks of using trade credit:
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.