More than Half of Small Businesses Rely on Trade Credit
Newer small businesses have long found it difficult to obtain credit from traditional lenders. Whether the reason for the denial is a lack of credit, or simply that the business has not been established long enough, small-business owners regularly find themselves in a Catch-22 situation. Namely, they cannot obtain credit because they do not have enough credit. For these businesses, trade credit is often the solution.
Trade credit is essentially when the seller provides the purchaser with payment terms for their purchase. In other words, instead of the purchaser taking advantage of the seller’s discount for fast payment for their order, the purchaser will pay the amount due over a period of time, with interest included. Trade credit is similar to one business giving another business a short-term loan.
Why Is Trade Credit so Popular?
A 2010 study conducted by the Small Business Association found that 60% of small businesses in the United States use and rely on trade credit. One of the most common reasons for doing so was the fact that traditional credit remains hard to come by, especially for newer small businesses. Trade credit can be so effective that some companies (about one-fifth of small businesses), rely on it solely for their business credit needs.
Why Do Sellers Offer Trade Credit?
Trade credit can be a valuable business tool when it is used properly. It can help improve a business’s sales performance, and many businesses look at the offering of trade credit as a sign that the seller is selling high quality products. Offering trade credit is also beneficial in helping one’s business stand out in a competitive marketplace, where their competitors are not offering a financing option.
How to Minimize Your Trade Credit Risks
Today, more than ever, trade credit offers businesses a valuable way to retain customers, and to build their brand, but it does have its risks. By offering another business credit, you are putting your trust in them to pay you what they owe. Should the business default on their credit payment, then your business may suffer a financial loss, or at least lose a lot of time and money in attempting to collect the debt.
In order to keep this type of risk to a minimum, it is recommended that you check the credit of any business interested in trade credit before you extend it to them. While checking credit does not guarantee a customer’s ability to pay, this will help ensure that the customers you are relying on for your revenue are creditworthy, with a history of managing their debts responsibly.