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.
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