Trade credit is a form of short-term financing offered by the seller of a product to a business that plans to resell the product. Research indicates that around 60% of small businesses use this type of financing.
What is Trade Credit?
In recent years, trade credit has become so widespread because it’s an easily available type of credit that doesn’t require a long, complicated application process and a stellar credit report/score.
That being said, most suppliers won’t offer it to new online businesses. Instead, they will start with C.O.D, or cash on delivery, or have the business pay in advance until they have proven that they can pay bills on time. Once a good track record has been established, it’s so much easier to negotiate trade credit terms with suppliers.
A supplier is much more likely to offer trade credit once the business has shown a comprehensive plan detailing why they need credit to support their venture.
Obtaining Trade Credit
It’s important to note that terms for trade credit vary and the cost is typically very high. For example, if you have a supplier that offers you a 2% discount if the invoice is paid within 10 days, with a net date of 30. This means that if you pay within 10 days, you get 2% off the price. On the other hand, if you don’t pay within 10 days, you give up that discount and have 20 additional days before the money is due. If annualized, it will cost you 36% of the products you’re purchasing.
Additionally, a supplier that offers trade credit will add penalties if the invoice is not paid within the agreed timeframe. These are typically between 1 to 2% per month and can quickly add up. Especially if you have difficulty paying for a prolonged amount of time.
Trade credit is helpful for a business in growth mode- but requires attentiveness and planning to avoid racking up late fees or losing money by giving up cash discounts. While it’s true that it’s smart to take advantage of trade credit when it’s offered, it’s also smart to consider alternative options that can work.
Alternative Options for Financing
One option for a small business is a bank loan. Unfortunately, these are not always easy to obtain. The process is long and complicated and if you don’t have excellent credit, you will likely be denied.
A small business credit card may help bridge the gap for some businesses- or you may wish to consider peer-to-peer lending or merchant cash advances.
Many times, small business owners opt to ask their friends/family for funds. This is a low-interest, quick way to get started- especially if you have people in your life that support your venture.
Another option may be a web-based lender offering non-traditional funding. In this case, the funds are available 24/7 and it’s free to apply. Many times, business owners find that a combination of this type of funding with trade credit can be a great way to have the capital needed to take advantage of vendor deals while also keeping inventory on hand to fulfill orders.
As a business owner, trade credit can be your best friend- especially if you use it in combination with other forms of financing. Just be sure that you take the time to weigh your options with the advantages and disadvantages to build your financial solution that supports your long-term growth. Be sure to contact Commercial One Group to learn about how trade credit and/or other financings can help your business.