The cost of supply and goods is one of the main expenditure items for small businesses. It thus makes sense to seek credit from suppliers to make operations smooth and uninterrupted. Trade credit allows owners to take supply and pay for it later within a stipulated period. They also benefit from discounts as part of the credit.
Sellers often extend trade credit to buyers, letting them pay the invoice in a week, fortnight or within 30 days. They also extent discounts when the invoice is paid in the set duration. Thus trade credit works as an informal and short term loan without any interest attached. Typically, trade credit periods extend from seven days to 120 days, and in case of jewelry can even be longer.
Trade credits are extended with specifics written down in short form. So an invoice with 5/15, net 60 means that the amount is to be paid in sixty days. If the buyer clears the bill fifteen days, they get five percent discount.
To select buyers for trade credit, suppliers use several sources of information to judge trustworthiness. These include accounting statements, credit scores, payment relationship with other suppliers, and past record of paying on time with the current supplier. Other standard norms of creditworthiness, such as character or capital also help selecting whom to extend trade credit.
Trade credit not only helps secure supplies without the burden of immediate payment, it also works towards improving credit scores. Opening a trade credit account and then clearing payments on time is a good way to make credit reports look clean and healthy.
There are some downsides to using trade credit. Extensive use of this facility can affect the image of a business, and can increase the price of supplies or management cost. Trade credit is still a preferred practice globally and accounts for around twenty percent of investment.
To find out more about net 30 trade accounts and how to use this facility, small business owners can consult online guides on how to get trade credit.