What is trade credit? What is characterized by? Who can take advantage of such a loan? What are the benefits of trade credit? You can read about all of its flaws as well as about its flaws goods, also known as trade credit.
Sometimes when buying goods or services their price does not come at all is the most important factor. Sometimes, more important than the final price are the conditions.
Usually, it is about the payment terms. Companies, enterprises do not always buy products at the lowest prices. These small and medium are often forced to enter into transactions where payment for goods or services will be deferred. In this situation, we have to deal with trade credit.
What is trade credit?
It is a commercial or commodity loan (open account) granted by the buyer-seller in transactions between companies. Trade credit has the form of deferred payment relative to date sales. Simply put: it is given by the seller to a buyer with deferred payment.
Credit merchant it a non-bank business financing form. It often happens that the buyer only then pays for the goods from deferred date payments when I sell it myself. So it’s agreement the seller receives payment for the delivered goods or service already after the delivery date.
The big advantage of trade credit
is that it does not require one particular legal form. What does it mean? Well granting such a loan may be confirmed by an agreement concluded between parties generally agreed on sales conditions or may result only from the payment deadline for a given good/service on the invoice. Sales made with trade credit can also be secured by an insurance policy (although this does not happen often).
As we know, all loans granted by banks are conditioned often carrying out complex procedures and the borrower to receive a loan must meet certain conditions. Often, small and medium-sized companies do not have sufficient creditworthiness to receive from bank any loan. Their income is too low. What more, many companies are still functioning, only thanks to the possibilities he gives them trade credit.
The concept of credit usually associated with the bank
However, the trade credit has nothing to do with the bank. one can so state that it is a special type of loan where partners are not economic entities financial institutions.
So anyone can give credit trade. A simple purchase/sale transaction will change into a loan merchant if the transaction partners agree on a deferment time of repayment. In that case, sometimes the loan will be the number of days between the release of the goods/performance of the service and the set deadline payment.
However, trade credit also has its drawbacks. Failure to meet the payment deadline by the recipient may affect the seller’s financial liquidity. It happens also that when big money comes into play and the amount will not be paid at all,
this contributes to the collapse of the selling company in this way. This usually applies to small companies that grant such credit to uncertain contractors.