In some cases, when business owners find themselves low on cash flow, they'll pursue trade credit. With this business financing 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 Definition:Trade credit can give you the opportunity to buy what you need from various vendors and pay them at a later time. If you receive a trade credit, you’ll have anywhere between 30 and 120 days to take care of your balance. Depending on the vendor, you may score a discount if you pay for your purchase before it’s due. However, if you don’t pay your balance by the due date, you may be on the hook for costly late fees.
Trade Credit Terms:If you use trade credit, you can expect an invoice with net terms. The net terms will determine how long you have to pay the vendor back. While every vendor has its own unique trade agreement, most include the following net terms:
- 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.
The Pros of Trade CreditThe greatest benefits of trade credit financing include:
- Relief From Cash Flow Issues
- Easy Qualification
- No Interest
- Customer Satisfaction
- Positive Long-Term Relationships
The Cons of Trade CreditBefore you use trade credit, be cautious of these drawbacks.
- May Be Expensive:
- Late Fees:
- Credit Issues
- Damaged Relationships