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How Important Is B2B Trade Credit

Selling goods and services on B2B trade credit is, by far, the most common way that businesses trade goods. About 60% of all small businesses use some form of trade credit to finance their operations.

But how important is trade credit, really? In this article, we’ll take a look at the basics of B2B trade credit, and why it’s so important for small business owners in Australia and worldwide. 

Defining Trade Credit Or “Net Terms”

Trade credit is the credit that businesses extend to each other throughout common, day-to-day operations. B2B trade credit is also sometimes called “Net terms.” This is because trade credit is typically extended on payment terms such as “Net 30 days” “Net 60 days” or “Net 90 days.” 

What this means is that a supplier sells its products to a buyer, and that buyer has 30, 60, or 90 days to pay the invoice. Essentially, suppliers offer a short term, interest-free loan to the buyer – which comes due based on the “Net terms” agreed upon in the sales contract.

Trade credit finance is an important part of global trade for a number of different reasons. Below, we’ll discuss a few of the benefits of B2B trade credit for both buyers and sellers in more detail.

Benefits For Sellers

Why would a supplier or seller choose to offer B2B trade credit? 

  • Encourages customer loyalty – When companies have credit extended to them on good terms, they are more likely to continue buying from your company – especially if you offer more favorable B2B trade credit terms compared to other sellers.
  • Helps boost sales volume – If your company offers trade credits, you can boost sales volume. Because the businesses buying from you will have more purchasing power, they can buy more of your goods and services, which leads to a larger customer base and more profits.
  • You get a competitive advantage – Using trade credit wisely can help you reach more clients who want to purchase your products, but don’t want to take out a loan. This can give you a major competitive advantage.

Benefits For Buyers

  • Provides more flexibility – Compared to another method of purchasing items, such as a business credit card, B2B trade credit provides more flexibility. There are no interest charges, and there are no penalties for waiting the full term before paying for the goods or services delivered.
  • Helps with cash flow – Credit extended to buyers can help with cash flow. Instead of having to pay for a shipment of goods immediately – before it’s even delivered – the company can pay after they have already received the goods.
    For a simple example, consider a renovation company that pays for a shipment of bathroom tile on Net 60 terms. They receive the tile and use it to complete a renovation project within 30 days. Then, using the profits from the renovation, they can pay for the tile they used in the project. This helps massively with cash flow.
  • Discounts available for paying early – It’s quite common for companies offering trade credit to offer discounts for early payments. For example, a company could offer Net 30 terms with a 2% discount if payment is received within 10 days of the 30-day credit being issued. This would be known in shorthand as 2/10 (2%, 10 days) Net 30 terms.
    The buyer can choose to pay early, if they wish, and get a discount for doing paying the supplier early. However, if they need more time, they can wait the full 30 days before paying without incurring any interest or other charges.

Protect Yourself When Extending Trade Credit With Trade Credit Insurance

You may be wondering what happens to bad debt if a buyer fails to pay. Will this affect your accounts receivable? The answer is “yes.” Unfortunately, it’s always possible that your buyer won’t abide by your credit terms, and will fail to pay.

Trade credit insurance is the best way to protect yourself from this. By working with a company like Niche Trade Credit, you can insure all of your B2B trade credit transactions, and ensure you don’t suffer any losses if your customers fail to pay. Contact us now to learn more! Give us a call on 02 9416 0670 or fill out our online enquiry form.

*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

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What Experts Think

How To Recover Company Trade Debt: Your Top Options

If you want to recover company trade debt, there are a number of different avenues you can take for business debt collection. There are a number of different ways you can initiate the debt recovery process, and recover the money you’re owed. 

In this article, we’ll discuss the legal actions you can take to recover debt and initiate the debt collection process. Note that this article does not constitute legal advice. It is your responsibility to recover debt in accordance with all relevant Australian laws for company trade debt recovery.

Begin With Written Reminders To Pay

In accordance with regulations from the Australian Competition and Consumer Commission, you can begin the process of recovering your money if your debtor has not abided by your terms of trade, such as Net 30 or Net 60 payment terms.

You may wish to first issue verbal warnings over the phone if your debtor has not paid, and follow this up with several written reminders to pay over the following weeks. Often times, this may be enough to get your debtor to pay without formal legal proceedings.

Write A Letter Of Demand

Letters of demand are a more formal written reminder to pay. They state: 

  • How much a business owes you
  • What they owe you the money for
  • When they need to pay their invoice

You can also include a warning that you are considering legal action if the debt is not paid by your specified date. Include the title “Letter of demand” at the top of the letter to ensure that the debtor knows that you are serious about getting the money that you’re owed.

Send A Statutory Demand

A statutory demand is a notice made by a creditor under the Corporations Act regulated by the Australian Securities and Investments Commission. It demands the payment of a debt exceeding the “statutory minimum” of $2,000.

The company receiving a statutory demand has 21 days to comply with the demand from the date of service, or contest the demand. If the company does not comply with the statutory demand or fails to contest it, it is presumed that the company can no longer pay its debts and is insolvent, and further court proceedings may begin to recover your money.

Consider Negotiating A Settlement Or Using A Mediator

You may be able to negotiate with a debtor to resolve a trade dispute or failure to pay – either by writing or over the phone. You may also want to consider using a third-party mediator to resolve the situation and recover your money.

Together, you can work with a mediator to resolve the matter and get paid. Mediators specialize in finding mutually-agreeable solutions to these kinds of issues.

Begin Court Proceedings

If you do not hear anything from the debtor and your debt is still unpaid, you may initiate legal proceedings against the debtor – such as suing them for the amount of unpaid debt as well as legal fees and costs incurred by their failure to pay. 

Note that this should be a last resort, as the fees and costs of court proceedings can be very high, and you may not be able to recover all of the debt if the debtor is insolvent and cannot pay your small business. 

Hire Debt Collection Agencies Or Sell The Debt

Another option is to hire a debt collection agency to try to recover the debt on your behalf. In some cases, you may also be able to sell the debt to the agency. They will usually pay you about 25-45% of the amount owed, in exchange for the rights to collect the debt. 

Avoid The Need To Recover Company Trade Debt With Trade Credit Insurance

With trade credit insurance, you can completely eliminate the need to recover unpaid debt. If your company trade debt goes unpaid, your insurance company will cover your costs – preventing losses from bad debt, and ensuring that cash flow is uninterrupted at your small business.

To learn more and see why trade credit insurance is the best way to protect your accounts receivable, just contact Niche Trade Credit now. We can discuss your options in more detail. Give us a call on 02 9416 0670 or fill out our online enquiry form.

*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.