Studies have revealed that cash is a luxury for many small businesses, with 40% of small businesses admitting they have experienced cash shortages within the previous 12 months, sometimes hindering incorporating a sole proprietorship. This phenomenon can be attributed to more than 60% of small businesses waiting on late payments.
One of the tools used by small businesses to get around delayed invoice payments is trade credit. Otherwise known as vendor credit, or “net terms,” trade credit allows small businesses to gain additional revenue from cash-starved businesses that cannot pay immediately.
What is trade credit?
Trade credit is a financing option that enables businesses to purchase products and supplies from other companies that they do not have to pay for right away. Small businesses in particular rely on this system of credit due to the difficulty in getting funding from other sources.
Common forms of net terms
Net terms give business buyers a cushion of extra time to pay their invoices. Sellers and vendors that offer net terms provide the product or service immediately. However, they do not expect buyers to pay until the agreed-upon time. The most common net terms are net 90, net 60, and net 30 trade credit.
Industries that use trade credit and net terms
Practically any enterprise in the business of manufacturing and distribution of products can use trade credit. Trade credit arrangements are available in virtually every industry where businesses transact with other businesses. Some of the more common businesses and situations that use trade credit include Cleaning services, Accountants and bookkeepers, Landscaping companies, Creative agencies, Clothing companies, Beverage manufacturers, Wholesalers, Manufacturers, Restaurants, and retail businesses.
Reasons for offering net terms
Relative difficulty in getting other kinds of financing
It drives competitive advantage
It is an affordable way of growing the business
It helps to build relationships with other businesses
It proves the financial security of a company