Even though some banks are starting to loosen their requirements for small business loans, many business owners still find that it is nearly impossible for them to access the loan amounts that would help their organizations grow. Instead of letting a bank’s stuffy loan practice slow your business, consider whether trade credit could help your business get ahead.
What Is Trade Credit?
Trade credit is an arrangement that allows a business owner to acquire goods or services without paying for them up front. For instance, if you own a grocery store, then you might get a shipment of food on trade credit. You would not pay the wholesale company for the shipment until a certain amount of time has passed. This gives you the opportunity to earn money to pay for the products. Of course, you have to repay the credit at some point. If you do not sell the items as expected, then you could face financial trouble similar to not paying your loan installment.
Another type of trade credit is more accurately defined as “consignment.” In this situation, a store puts items on the shelf. When customers buy those items, the store pays the wholesale company. If they do not sell, then the store might eventually return the products without any penalty. In a sense, the store never actually owner the products, but rather worked as an intermediate to get the products from the supplier to the consumer.
Who Should Consider Using Trade Credit?
Trade credit often works well for businesses that sell products directly to consumers. That includes retail stores, groceries, liquor stores, restaurants and home supply stores. If you have a business that sells items directly to customers, then trade credit could be the best option for you, especially if a bank has turned you down for a small business loan.
Are There Disadvantages to Using Trade Credit?
Disadvantages only appear when you can’t pay your supplier for products. The supplier will give you a predetermined amount of time (usually a month) to pay for the order. If you do not make enough money during that month to pay them, then you could face penalties and, potentially, lawsuits. That means you should understand your target market before taking a supplier’s products on trade credit. If your customers don’t buy, then you could find your business in financial trouble.