Understand the Different Kinds of Trade Credit to Choose the Right One for Your Business

Understand the Different Kinds of Trade Credit to Choose the Right One for Your Business

Credit means delayed payment. Cash sales in business are welcome but sales volume will never be large because clients don’t always have smooth cash flow. Undoubtedly, trade credit increases the sales volume. You get to opt from three kinds of trade payable or credits.

Niche Trade Credit has supported many businesses from the potential risk of going insolvent because of their customer’s unpaid invoices. In such cases, the credit insurance pays the seller up to 80% of the owed bill amount. This makes sure your business has sufficient capital. A single unpaid bill can lead to large issues. So, worldwide businesses can contact Niche TC based in Sydney!

Trade credit types

Open credits

It is an informal agreement, where the supplier dispatches the orders after checking the buyer’s creditworthiness. The invoice is also sent with the dispatched order, which includes the particulars of the items, price, total payable amount, and payment terms.

The buyer will record his liability to the supplier in the balance-sheet as open account payables. The buyer is anticipated to fulfill his payment onus before or on the due date.

Bill payable

It is a commercial draft, a seller draws. The buyer accepts this draft for payment on or before specified expiry date. The draft or bill indicates the bank details, where the amount needs to be paid. The order gets delivered against bill acceptance.

Seller retains the bill to be presented for payment on the due date. The seller may even raise funds instantly by discounting with the banker. The buyer then pays the bill amount to the bank on the due date.

Promissory note

The buyer signs this promissory note, which mentions the terms of payment duration and total amount. A promissory note is an instrument of debt acknowledgment and commitment to paying on a specified date. For delay in payment, the seller can even add an interest or penalty term in the promissory note.

How trade credit terms get determined?

Firm size 

Small businesses depend a lot on trade credit because there are hardly other affordable financing options available in comparison to large or medium companies. Large organizations are less susceptible to gain credit from sellers in comparison to small firms.

Small firms find it hard to maintain creditworthiness during financial strain. Therefore firm size is a crucial determining factor.

Product nature

Fast selling products need short credit terms, while the items that take longer to cause cash flow need extended credit stipulations.

Seller’s financial status

Seller’s financial condition will also influence the period and amount of credit to be offered. The weak seller needs to get strict with their buyers and operate on high credit terms. The strong seller can dictate severe credit terms but prefer to extend the credit period generously.

Remember, extended credits to small firms and acceptance of higher risk is affordable for strong sellers. Suppliers tight on working capital will be keen to provide high cash discounts for encouraging early payments.

Buyer’s financial position

The creditworthiness of the buyer is crucial to determine the credit terms. Large buyers can insist on small suppliers with vulnerable bargaining power, extended credit terms.

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