While consumers no longer pay for goods with an I.O.U., the courtesy of credit trade lines still exists in the business world. A buyer and seller negotiate a credit of trade for goods and services sold instead of a credit card payment or cash on delivery. Providing your customers with a trade line of credit allows business start-ups to get off the ground and allows clients to continue running the business during lean times. This added benefit breeds client loyalty and trust as well as increased profits.
Just like consumer credit, business trade credit is not free and exposes the supplier to nonpayment risk. You can, however, manage this risk factor with the following:
- Grant trade credits to noncash customers and discounts to cash clients. Limiting discounts to cash customers offsets the potential nonpayment risk that comes with offering credit.
- Investigate your credit clients' creditworthiness and manage trade credit loans.
- Use trade credit insurance in conjunction with the other options to eliminate the cost of nonpayment.
Offer established credit trade lines and cash discounts to increase profitsGive a discount to cash customers to reduce credit costs and reward cash customers with the best price. The benefit of cash discounts, also called early payment discounts, rides on the payment period you set and the payment methods you accept. Generally, the business industry recognizes cash in its various forms excluding credit cards.
Assess your client's credit risk and delegate trade credit loan managementConsult a business credit bureau before extending credit to customers. Besides credit references and your direct client experience, credit bureau reports offer a snapshot of a client's creditworthiness and the state of the business. Enlist the help of a credit outsource company to manage your trade credit agreement, relieving you of the finer details of granting credit. Identifying your client's payment history creates sound trade credit decisions.
Protect your profits with trade credit insuranceUnforeseen events can turn a trustworthy client into a greater credit risk. Based on your business operating style, insurance can cover the cost of nonpayment of trade credit in business. While trade credit insurance reduces the effects of nonpayment, you first need to determine if your company's exposure is high enough to warrant the cost of coverage.
- Offering trade credit only on purchases of a certain amount reduces overall costs and nonpayment risk.
- If you prefer to manage trade credit in-house be prepared to determine late payment fees, trade credit interest rates, application terms and collection processes.