Guest post written by Michelle Ryan. To gain exposure by writing for us, read our write for us guideline.
Trade credit is basically defined as the trade relationship between the small business owner and the suppliers. Here the supplier agrees to give their goods and services to the business firm on credit; when a firm agrees to pay such a kind of credit it is ready to receive a later payment for its goods or services.
In the present economic environment, business firms are leveraging their merchant relationships to get a better finance for their business operations. Building relationships with merchants and establishing business credit are the tools built during good times that help the business to remain solvent during tougher times.
Trade credit acts as the best tool for it and performs many functions like:
- It provides a portion of the capital investment for small businesses
- It is also used as a collateral for other types of finances in most developing countries
- The other significant function of trade credit is that a business will be in a position to increase revenues by turning off expenses.
- Using trade credit in an appropriate manner will provide a significant means of increasing capital and will also help in building a commercial credit history for the business firm because on-time payments show a record of financial stability.
- Maintaining a good trade credit will make a huge difference when your firm needs an extended operating capital, expansion loans or any other type of financial back up.
- Trade credits are always proven to be a better substitute to bank credit as the repayment amounts for it are lower than the bank loans. They do not need any down payments to be made and offer lower interest rates. This is the main reason why trade credits are widely used for operating supplies of products and services.
Maintaining Trade Credit:
It is very important to maintain a good trade credit to avoid getting into adverse conditions. The first thing that you need to do is to maintain a stable and dependable payment history with your suppliers. This is important as the suppliers will consider your credit history as the foremost factor in order to carry on further crediting decisions.
Maintaining your trade credit would become a difficult task if you do not possess a good payment history; as the suppliers will be reluctant in offering you further credit if your payments paid on time. So if a situation arises where you feel you cannot make the payment for a particular month then you can opt for a Payday Loan and complete your payment; this will help you to maintain a stable credit history.
Michelle is a tech writer from UK. I am into Finance :). Catch me @financeport