Businesses often rely on credit to get by - from paying for supplies to meeting inventory overheads, and a lot more. It not only eases the cash load on companies but also allows them to utilise revenues better. In this regard, there are several options that businesses can access, both from financial institutions and participants in the supply chain.
Trade credit is essentially a B2B financing option. The primary way of how to get trade credit is by establishing a degree of credibility and rapport with the supplier. Through this credit option, businesses can better optimise their cash flow, and manage working capital efficiently.
However, trade credit may not be the ideal choice in all use-cases and every business. Hence, companies should know about other working capital solutions like invoice discounting that can help them during difficult times. With KredX, businesses can easily leverage their accounts receivables to acquire working capital, and manage their operations smoothly.
Certain buyers resell goods after procuring them from another business. The most common example of this is the wholesaler-retailer relationship, where the wholesaler sells goods in bulk to a retailer, who then resells them to the consumers.
In this example, the credit that a wholesaler extends to a retailer is called trade credit. It’s a relatively simpler process of availing credit, as it does not involve any formal documentation process. Even an enterprise’s credit score might be irrelevant in this regard.
However, new businesses or ones that have recently tied up with a supplier may not be able to enjoy this credit option. That’s because the supplier has no basis on which it can trust an enterprise to make good of its dues in time.
Businesses that are on good terms with their suppliers, owing to an already established track record of timely payments, can avail the trade credit option. Usually, it’s extended for only a few days, like a month; but, highly credible buyers can negotiate for longer repayment terms.
Trade credit is beneficial not only from the buyer’s perspective but also from the seller’s because it encourages more businesses to engage in trade with them. However, sellers need to ensure timely repayments, for which reason it has protocols in place, like –
By incentivising and penalising early as well as delayed payments, businesses can ensure their liquidity is well maintained. However, even then, payment delays can occur, sometimes to an extent that goes beyond an estimation.
Sellers can mitigate such cash flow issues with options like bill discounting service via KredX within 24 – 72 hours*. However, buyers committing such delays might lose the edge in getting a trade credit in the future.
The cost of this credit facility can differ considerably, depending on the supplier and its relationship with a buyer. Usually, there are two types of costs a business should know about when considering to get trade credit –
Suppliers often provide discounts on early payments. Suppose, Supplier A sells Rs. 1 lakh worth of goods to Buyer B, and extends a trade credit period of 45 days. He also specifies a discount of 2% for payment within 30 days.
If B does not pay within 30 days, he is losing out on 2% discount, which annualised can come to –
(360 / 15) x 2% = 48%
By missing discounts constantly, a business’s opportunity cost can turn out to be quite substantial, which it could have utilised for growing its operations. For example, in this case, assuming B orders Rs. 1 lakh worth of goods each month, throughout the year, it can cost him up to Rs. 576,000 for missing out on early payments.
Late payments can also add up to a high cost for a business. Suppliers typically charge between 1% and 2% per month for late payments.
To avoid these costs, it’s best to plan on the payment front, which particularly applies to businesses that are in their growing stages.
It’s also wise to consider other cash flow solutions as well. There can be various situations in a business where it can face a cash crunch, and simply knowing how to get trade credit does not serve any purpose, other than payment to suppliers.
There’s a range of other expenses like rent on office premises and warehouse, salaries, etc. that an enterprise has to address in the short-term. In that regard, businesses can consider options like P2P financing, business credit cards, and invoice discounting.
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