You may not be too familiar with this if you’ve recently become a small business owner. Although, trade credit is the primary form of credit used by business owners. The gist of it is as follows: you (the seller) are financed by the company from which you’re purchasing goods. You will then resell the said product and remunerate the parent company. We’ll take a deeper dive to see how it works with examples.
How to Qualify for Trade Credit
Although the application process is a good deal shorter than that of other loans. You still need to have a well-established business plan to expedite the process. The offering of trade credit is up to the supplier, of course, and a solid financial plan is a huge point in your favor.
Note that the above is primarily true for brick-and-mortar businesses. Online businesses are not usually eligible for trade credit unless or until they have established a good history with the supplier. Before that, everything is cash on delivery.
Understanding Trade Credit With an Example
Consider selling for a company: once you receive the merchandise, you now have 15 days to sell it and receive a 5% discount (this is rather high – but note it’s just an example) in cash as long as all of it is sold within this time frame. If you cannot sell it within this time, you lose the 5% discount advantage. However, you are still compelled to pay within the max contracted time frame of 30 days. There will often be late payments attached if the 30 days pass and you have not managed to recompense the supplier – anywhere from 1%-2% for each month that passes.
It’s important to keep in mind the proper role/benefit of trade credit. It often works for growth companies that are growing quickly enough that you can take advantage of the discounts for early payment to your supplier. To learn more, reach out to us at the Ideal Financial Group.