Trade Credit and how businesses can take advantage of it

Businesses, especially small businesses often struggle with liquidity. Research has revealed that about 40% of small businesses admit they have experienced cash shortages within the previous 12 months. This is largely attributed to the fact that 64% of small businesses wait on late payments, according to an analysis of over 20 million invoices.

Trade credit is one of the options available to businesses to finance their operations, enabling them to buy products and supplies from other companies that require immediate payment. Sellers that grant their customers trade credit generally give them anywhere between 30 and 120 days to settle their accounts. However, the range can be higher or lower, depending on the industry and individual seller. On the flip side, sellers that use trade credit often offer discounts to customers that pay their full balance before it is due.

Trade credit has become increasingly popular in the last decade, particularly since the 2007–2008 financial collapse, with traditional lenders tightening their belts and lending fewer dollars to small businesses. 

60% of small businesses currently use either formal or informal systems of trade credit to finance their operations. This makes it the second most popular form of small business financing, with 43% of B2B transactions relying on trade credit for financing.

Small businesses have had to heavily rely on trade credit due to the difficulty in accessing funds from other sources. Some of the reasons for small businesses using trade credit include

  • Difficulty for SMBs in getting other kinds of financing.

  • It helps the business to grow.

  • It drives competitive advantage.

  • It proves a company is financially secure.

  • It builds relationships.

One of the major challenges faced by business owners is
how to get trade credit for their business. Below is a simple process to follow to secure trade credit.

  • Shop for a vendor

  • Fill out an application

  • Wait for supplier to run credit checks

  • If approved, begin negotiating terms with the vendor

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