Introduction
Trade credit depends on many factors and is affected by the current state of business, market conditions, and the company's financial standing.
As it is a common practice nowadays to trade goods and services through credit, an important question arises on what factors affect trade credit. Trade credit is a non-recourse loan sufficient to cover the cost of goods and services promised in an invoice or bill of lading. The term of the loan can range from days to months depending upon the financial policy and other ownership considerations.
The importance of trade credit depends on the industry in which you are operating. It also depends on what type of goods and services you are dealing with. The good news is that certain things will make your business stand out from other businesses in the same line of business.
The size of the trade.
The size of the trade is an important factor in determining whether or not a business can get a loan. The larger the trade, the more likely it will be approved for funding.
However, other factors play a role in whether or not a business can get a loan. For example, if your company has been in business for a few years and has proven itself to be a reliable company, then you may have more options available than someone who just started their company.
Another factor that plays into whether or not your company can get funding is its location. If you live in an area with high unemployment rates, then banks will be less likely to approve loans for companies located there because they may not be able to pay them back if they go out of business before being able to repay their loans.
How long you have been a customer.
Trade credit is the most important factor for a company to be able to borrow money from other companies. It depends on the time you have been a customer, as well as your reputation with the bank.
How long you have been a customer has a lot to do with how much credit you can get from the bank. If you have been with a company for a long time, then you can expect credit from that bank in the future.
It also depends on your reputation with them as well as how much money they know about you. If they know that you are a good customer, they will give you more credit than someone who has only been there once or twice.
How good you are at managing your finances, such as invoicing and paying on time.
If you have a strong credit history and a solid payment history, you can get the most favorable terms from lenders. Many lenders will give you better rates if you can demonstrate that you are financially responsible.
If you have a poor credit history or spotty payment history, it may affect your ability to obtain a loan or line of credit. You also may be required to put down more money for the loan than someone with better credit.
What are the components of trade credit?
1. The buyer of the goods or services pays for them in advance, either by cash or by check. This is called payment in advance (PIA) or purchase order (PO).
2. The buyer buys the goods or services at a discount from the price they will fetch when they are delivered to the buyer. The discount is called trade credit. The amount of discount depends on the nature of the transaction and is usually expressed as a percentage of the invoice price per unit quantity.
3. The seller does not make payment until after he has received delivery of his goods or services, usually upon completion of an installation project for which he was paid in advance (installation payment).
What are the most common terms for using trade credit?
Trade credit is an agreement between two parties in which one party agrees to pay another party a pre-determined sum of money. The amount of money paid depends on the supplier's creditworthiness and the purchaser's ability to pay.
The most common form of trade credit is for a company or individual to purchase goods or services from another company, which then pays the supplier a pre-determined amount of money. In return for this, the supplier promises to deliver the goods or services at agreed-upon dates by their contract.
Suppliers use trade credit agreements when they need large amounts of money quickly and they have little or no collateral available through which they can obtain credit from a bank. For example, a manufacturer who needs to purchase thousands of items from suppliers may offer each supplier a lump sum cash payment rather than waiting for each purchase order to arrive in its usual form (ie: on a credit card).
Conclusion
Trade credit (trust) is dependent principally on the correctness of the trade policy, and on the state of commercial morality in a country. Next in importance are the perfection of transport, extent, and swiftness of banking facilities, the elasticity of bank rate and its freedom from political meddling, stability, and security of the legal system.
Trade credit is a useful tool for those who want to purchase goods abroad, as well as for exporters or wholesalers. The nature of the market and the trading process in many ways depends on the company´s financial condition, reliability, and goodwill.
While the answer to each of these questions will be unique for every individual, what is clear is that the factor with the highest impact on your decision is yourself. That's where you need to start. If the principal purpose of any trade credit transaction is to ensure a healthy relationship between buyer and seller, then you have to remember that by giving yourself some options and ensuring that you can utilize them when necessary, you will be doing your part in making sure that your business and your reputation remain in great shape.
0 Comments