Trade credit is a situation in which a vendor or supplier chooses to extend some type of credit terms to a customer. The exact structure of the credit may include liberal terms that allow customers to secure goods and services immediately with up to 90 days to settle the balance due, or involve extending a revolving credit with a maximum limit that the client can pay off by making at least minimum payments every accounting period. The advantages of trade credit apply to both the vendor and the customer, including the ability to obtain products for a reasonable price and interest rate and the opportunity to build up a loyal client base that is more likely to consider the offerings of the vendor before looking elsewhere for products that are considered necessary or desirable.
For the customer, the various advantages of trade credit can be very helpful when it comes to financing the purchase of various goods and services. Depending on the terms associated with the credit agreement, the interest paid and the overall repayment terms may be superior to financing the purchases using bank loans or credit cards. In addition, trade credit is often easier to obtain than a bank loan or a credit card, making it ideal for a business that is recovering from a series of financial reversals to begin rebuilding the company credit rating.
Suppliers and vendors also reap the advantages of trade credit extended to their customers. This approach allows the vendor to earn a little more from the purchases, since interest can be charged according to the terms of the trade credit agreement. By contrast, if the customer uses other means of payment, there is no interest income generated. In addition, taking on the risk of extending a minimum credit limit to a client who is recovering from past financial circumstances can help to build customer loyalty that results in more orders as the customer regains a solid financial base. That loyalty often translates into doing business with the vendor who was there during the hard times rather than making purchases from another vendor who was not willing to take a chance on the customer.
While the advantages of trade credit extend to both buyer and seller, it is important to make sure the terms of that credit are workable for everyone involved. Suppliers should set credit limits at levels that are in line with the risk involved, while customers should read and understand all the terms and conditions that have to do with the extension of that credit, and be sure that complying with those provisions is not only possible but also probable. By doing so, each party stands a better chance of enjoying the advantages of trade credit without having to deal with any of the potential liabilities.