Trade credit – how does it work, what benefits does it give and who can take it?

Running a business is governed by its own rights and obligations. Incurring financial commitments is very different from standard loans taken by private individuals who are not self-employed. Banks, wanting to respond to the largest possible audience, propose a number of new services, solutions and opportunities. Introduced so-called trade credits remain omitted many times. In the case of an enterprise, this can mean a significant loss of additional opportunities. What is this loan? Who is entitled and how is it different from traditional non-trade credits?

 

Trade credit definition

Trade credit definition

The terms commercial or commodity are used interchangeably. It is a specially prepared, peculiar form of settlement, undertaken by entrepreneurs. The first person, who is the buyer’s side, gains the goods, and the second person, who is the distributor – faster and profitable sales. However, this type of transaction carries a lot of risk. Mainly due to too hastily allocated trade credits that hold back liquidity.

Imagine a situation where our restaurant begins to feel financial shortages. Ordered goods for a certain amount definitely exceed our financial possibilities. In short – we are not able to pay for it. In this situation, taking a trade credit involves postponing (postponing) the repayment date. Thus, the transaction takes place between the restaurant owner and the supplier, without the participation of banking institutions.

The advance paid before the delivery is also a kind of trade credit, more often called the recipient’s credit. This form of payment is a type of guarantee and security between entrepreneurs.

Thus, we have two forms of supplying and taking trade credits: in the form of a supplier credit and in the form of a customer credit (i.e. in the form of the abovementioned advance payment)

 

Why is it worth to take a trade credit?

Why is it worth to take a trade credit?

In the case of traditional loans, many factors are taken into account – interest rate, installments and deadlines. In this case, all this happens without the bank’s participation, and often faster repayments can result in a discount and a lasting business relationship. Of course, like everything that relies heavily on trust – the risk is really high. While expanding contractors and creating a solid group of regular and trusted customers is important, companies at this stage often face fraud attempts. That is why insurance was introduced. When we do not receive the full amount resulting from the invoice – the insurer will deduct 10-20 percent of the so-called own contribution.

Another method of security is the so-called discount – i.e. a discount. It consists in the fact that the seller lowers the price for immediate payment. At the same time, the customer can determine how much he will pay and on what date.

In addition – trade credit is often granted free of charge, has no hidden small costs or small prints. Paperology is definitely smaller, mainly eliminating the complicated banking and financial path.

 

Trade credit pattern

Trade credit pattern

Of course, the contract template is best downloaded from reliable sources. After downloading them, we will only be able to complete the necessary data ourselves. If, however, you decide to make such a design yourself, remember to include such elements as:

  • maximum loan period in days
  • discount period, i.e. the number of days from the date of sale for which interest is not accrued until the date of accruing interest
    data of both parties
  • repayment period – usually 30 days – but this is a matter determined individually and not imposed by law from above