Trade credit is a wonderful thing; it allows businesses to operate on a contractual basis with suppliers to keep their company running; paying for them on a regular basis with agreed terms. It is the credit suppliers extend to businesses, allowing them to buy now and pay later. In effect, it is very handy for businesses who perhaps cannot get loans or funding from the bank, but need to keep their stock coming in.
It is common practice within business, and can be a very useful tool not only for companies selling supplies that they need to outsource, but also for suppliers wanting to fend off competition. Smaller businesses may be more inclined to go with a supplier that offers trade credit rather than one who demands money upfront, so if you’re thinking of offering trade credit for your goods, read on.
There are some things to take into consideration before you do it.
Can you afford to have money floating?
When you offer trade credit, you are giving away your supplies without immediate payment. You need to ensure you can afford to wait for money owed to you. Analyse your cashflow, and plan ahead for the time when money won’t be coming into your business. Are you able to afford your own expenses? What terms can you offer a customer? How long can you manage without money coming in? All of these things should come into consideration before offering trade credit to a potential customer.
Do you know who you’re dealing with?
Never enter into a contract blind. Offering trade credit is similar to offering a loan to a company, so if a bank runs a credit check on an individual, you should run one on a business. Check potential customers’ company credit reports and find out how they pay their bills. Creditsafe’s company credit reports offer trade payment data, and will show you how many days it takes a company to pay its bills as well as if they are getting better or worse at it. It will also give you access to key financials, so you can check yourself to see if the company is struggling or thriving. Always do your research into a company before agreeing to offer them trade credit, after all you are offering to trust them to pay you for the stock you give them, so cover your own back before doing so.
Dealing with late payments
Unfortunately, late payments are now a common trend within the business world. Last year more than half of invoices across the UK were paid late, and experts see no signs of this new trend slowing down. When you offer trade credit to a business, you run the risk of dealing with late payments. A way to discourage your customers from paying you late would be to offer incentives. The price of trade credit is historically fairly high anyway- and rightly so as you are giving your customers the time to come up with the money after providing them with the goods. If you could offer customers a discount for early payments, that usually acts as an encouraging factor for customers to pay their bills on time.
For example, you could offer a 3% discount to anyone who pays for their supplies within 7 days. Or even a 2% discount to someone who pays within 14. Little incentives such as this will kick savvy businesses into gear when it comes to saving them money, so definitely look at discount incentives if you are planning on offering trade credit.
Trying to avoid late payments brings us onto our next point- what do you do if you can’t? Inevitably, if you have been in business for a few years you would have been stung by a late payment, and arguably offering trade credit will open you up more to this happening. If you do suffer a late payment, put penalties in place so you are paid interest on each day the payment is late. Banks do it with individuals and businesses, so you can also do it with trade credit- this could also act as an incentive for your customers to pay on time.
If you would like a free sample of a company credit report to see what you could find out about a business before offering them trade credit, please click here.