Basics of trade credit

Basics of trade credit

Most of the business owner likes to conduct the sales on a cash basis but it is not possible to do so in the current competitive marketplace. There are times the sellers are required to offer the sales on the basis of credit term so that the customers will buy the products from them. To sell the product on delayed payment terms has opened up a new aspect in running the business- management of the trade credit extension to the customers.

Everyone comes up with new methods and ways to woo their customers. Even the online trading platforms come with many offers to get more clients. But one should not get carried away by the promotional stint conducted by the firms. Instead, you have to do research on the firms they wish to work with and go through the reviews. Read about bitcoin loophole here to know more about it.

Benefits of trade credit

Customer loyalty-Once you extend the credit terms, it conveys the message to the buyer that seller has confidence in their repayment capabilities and are trustworthy. A buyer, in turn, rewards seller by continuing to buy from them.

Increased sales- The customers will buy more quantity of products if they are not required to pay the cash up front and this increases the sales.

Competitive advantage- The seller who has been able to offer the trade credit would have an advantage over their competitors if the competitors are not able to offer them credit terms. Naturally, a buyer will prefer to buy the goods on credit terms than paying the cash for all the purchases.

There are even some disadvantages of offering trade credit to the customers and they are listed below.

Disadvantages of offering trade credit

Monitoring accounts receivable- When you offer trade credit, it increases the outstanding accounts receivable amount and there should be a dedicated team to monitor if all the customers are making the payment on time. If the company is dealing with only cash, then they don’t have to face this problem.

Creates a negative effect on the cash flow- The immediate effect created by the trade credit is that the seller does not receive payment in cash immediately for the sales.  Sellers would have their own payments to make and extending the credit terms will create a huge hole in the cash flow of their business.

The possibility of bad debts- Inevitably the trade credit will lead to a few of the buyers not paying the amount and the business might have to write off that unpaid amount as a loss.