Statistics show that about 40% of small businesses experienced cash shortages within the previous 12 months. This is largely attributed to the fact that 64% of small businesses are waiting on late payments, with as many as 20 million invoices outstanding. Some businesses often resort to trade credit instead of denying cash-strapped buyers their orders—and sacrificing the accompanying revenue.
Trade credit is otherwise known as vendor credit, or “net terms” and has become increasingly popular with businesses that serve other businesses (B2Bs). This funding option enables a small business to gain additional revenue from cash-starved businesses that cannot pay immediately.
Who uses trade credit and why?
Trade credit became particularly popular after the 2007–2008 financial collapse as traditional lenders began to tighten their belts and lend fewer dollars to small businesses. Small businesses in particular rely on this system of credit because funding from other sources, such as major banks, is so difficult to come by.
What are net terms?
Net terms are similar to consumer credit cards, giving business buyers a cushion of extra time to pay their invoices. The commonest net terms are Net 30, Net 60, and Net 90.
Net 30 trade credit is a very common trade credit term with payment due in full within 30 days. Consequently, borrowers, in this case, buyers, are required to make full payment within 30 days. Many vendors also offer discounts to customers that pay early.
Industries that use trade credit and net terms
Virtually any business involved in the manufacturing and distribution of products can use net 30 trade credit or any other net terms to accelerate their cash flow. The common businesses and situations that use net terms include cleaning services, accountants and bookkeepers, creative agencies, clothing companies, restaurants, and landscaping companies. Manufacturers, wholesalers, construction companies, retailers, and beverage manufacturers can also use trade credit for their businesses.