Credit Trading – All You Need To Know
Table of Contents
What is Credit Trading?
The loan provided by one trader to another, on the condition that the services or products are purchased on credit is called Credit Trading. It is mainly used by businesses and corporations for facilitating short-term transactions and finances. It can also be used to facilitate purchases with the promise of providing payment at a later date. without the need of paying for them immediately.
Trade credit provided to the customer by an organization is called ‘accounts receivable’ and the trade credit which is extended to an organization by its suppliers is called ‘accounts payable’.
Benefits of Credit Trading
New, as well as, small businesses generally face the problems of financing themselves through traditional and typical money lenders. It is impossible for them to finance themselves in a manner similar to those used by big and established firms and organizations. Therefore, credit trading is especially helpful for these young businesses, as it would enable them to establish themselves, their trade, machinery, services, staff, and other necessities properly, and finally, after their businesses begin to make profits, trade-in business credit. Trade credit is given without any interest charges, which highly reduces the chances of the business being buried under debt, or worse, going bankrupt.
Credit Trading has also proven to be beneficial for money lenders, suppliers, and other major service providers. It allows them to establish new business contacts, form partnerships with new corporations, earn the trust and loyalty of their clients, build their names as supporters of new startups, gain more clientele, and of course, make and reap profits.
Purchasing on Trade Credit
It is extremely beneficial for new businesses to purchase goods, services, and other materials through trade credit, as it is usually offered without any interest charges, which naturally decreases the total amount to be repaid by the corporation, thus cutting down its expenses. Trade credit is usually given for 7, 30, 60, 90, or 120 days, but maybe extended for some businesses. The sale terms mention the time period for which the credit is being granted, the possible discounts that could be given, and the credit instruments that would be used. The most common one is net 30, in which the loan has to be completely paid within 30 days.
Some businesses might be able to pay their loan back before the due date. In such cases of early repayment, the lenders or suppliers might give discounts to their clients, something which is not generally done with banks and similar organizations. Early repayment by a new business would also help it in building a good reputation for itself, which would allow the said business to gain clients and in increasing the possibility of their loans being granted by other lenders and suppliers.
The credit period for each business or corporation varies, depending upon the transactions and trade that they are engaged in. A business dealing with food items or perishable goods would generally use net 7, while bigger industries may use net 30 or net 60. It is the lender or supplier that devices which credit period to offer to which business, after carefully considering how much money they can afford to invest in the particular business.
They mainly consider the chances that the loaner might not be able to repay them, thus preferring not to invest in highly risky ventures; the business’ account size, a smaller account will get smaller credit period; and the goods or materials that are being dealt with, if the goods are perishable or possibly ruin easily, the credit provided will be small.
Extending and Increasing Credit and Credit Period
As mentioned above, trade credit is beneficial and risky to both the customer, as well as the supplier. If a business does not perform well and if it is unable to repay its loans timely or at all, there is a high chance that it will not be provided credit again. On the other hand, if a new business starts flourishing and profiting, then its suppliers and lenders are also bound to flourish and profit. And if the suppliers and lenders profit, they will be interested in extending and increasing the credit they are providing to these businesses.
Extending trade credit would also help the organizations in increasing their businesses relationships and profits with their clients. It would also give them a reputation boost among other new businesses, thus improving the possibility of receiving more customers.
Checking Prior Credit Statements
Before providing credits to any business or organization, the lenders naturally check their details and background. This is done to ensure that their money is being invested in what they want to invest it in, whether their potential client is legitimate or not, if it has or had been involved with any monetary problems, whether it is capable of timely repayment, or not, etc. They usually do so by checking the customer’s reports with banks and other lenders, their financial statements, their credit history, and reports, etc. Therefore, in order to receive any trade credit, it is essential that any and all businesses should ensure that all the above-mentioned and related details should be clear, accurate, and complete.
In today’s time, trade credit has proven to be extremely useful and helpful to firms that cannot avail their monetary necessities by other means. Small and young businesses, now, do not have to worry about their inability to gather or loan funds from other sources, thus reducing their chances of overburdening themselves with problems like debt and high-interest rates. But that does not mean that credit trading is without its risk. Both the customer and the lender carry the risks of heavy losses, failure in providing or repaying the money, and losing their goods as well as partnerships. It is extremely necessary to be completely sure, careful, and decisive in choosing and agreeing with whom one wishes to trade with. The pros and cons of credit trading should be diligently considered. Check out Bitcoin Rush and get started with Crypto investment.