Trade credit is the process of providing someone with goods and services with the promise of receiving payment at a later date. The payment usually carries interest along with it. However, once you start throwing different currencies into the mix, fluctuating commodity prices and other ever-changing economic factors, trade credit in business is a bit more complicated than owning a consumer credit card, for example.

Before applying for business trade credit, it's smart to get cursory knowledge of what it entails as well as the latest news and trends moving the industry. Trade credit insurance and credit trade lines are constantly being affected by both micro and macro factors. Reading up on trade line credit will give your business an edge over the competitors.

1. Visit national bureaus or government websites for the latest information on trade credit news and trends.

2. Read magazines that discuss trade credit to keep up on the latest news and trends and how they affect your industry.

3. Obtain published papers about the trade credit industry and the credit of trade.

Action Steps
The best contacts and resources to help you get it done

Check out national organization websites for trade credit news and trends

National bureaus and boards are always completing reports that study the health of the economy. Part of the health measures the status of trade credits and trade credit spreads amongst key industries. Visit their websites and read up on their latest published reports. Trade credit reports are produced quarterly, bi-yearly and yearly for many industries.

I recommend: Check out the website for the National Bureau of Economic Research. This offers papers and reports on the latest news in the trade credit industry. Also check out the website for the Federal Reserve. The "Staff Studies" reports cover trade credit within various industries. Simply click on the span of years you are interested in and a pdf file discussing trade credit will appear.

Find articles in magazines both online and in print regarding trade credit

When it comes to applying trade credit to your business model, you want to make sure that you are up on the latest news so you know what your business will need to provide in terms of sales proof in order to get an extension of credit. Other fluctuating terms are the amount of credit extended and at what interest rate it is being offered. Staying on top of these issues will allow you to make the best decisions for your business.

I recommend: Check out the website for the National Association of Credit Management, which produces a magazine available online and in print that discusses issues like trade credit. Entrepreneur magazine is another quality source for periodic articles about trade credit.

Read papers that have been published in journals about trade credit

The business department of universities as well as many other economic boards often commission studies or release reports about trade credit. Obtaining these published reports is a great way to have an in-depth look at the trade credit industry as a whole. The information you gather will be a lot more in-depth than the quicker articles you'll be reading in online magazines.

I recommend: Read published reports by economic scholars. Oxford Journals publishes such reports that are available for sale. The Journal of Business also publishes papers about trade credit, trade credit insurance and other aspects of how trade credit is used.

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:

1. 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.
2. Investigate your credit clients' creditworthiness and manage trade credit loans.
3. Use trade credit insurance in conjunction with the other options to eliminate the cost of nonpayment.

Action Steps
The best contacts and resources to help you get it done

Offer established credit trade lines and cash discounts to increase profits

Give 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.

I recommend: Take the Get Business Credit Now tutorial through Ark Refreshments to determine if trade credit will improve your business. Ark offers a fee-based six-month training program and coaching to implement a trade credit program that fits your company needs. Conduct the extension of trade credit with an application. Download the Credit Guru's sample credit application for guidelines.

Assess your client's credit risk and delegate trade credit loan management

Consult 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.

I recommend: Research your client's business history through a business credit bureau such as Business Credit USA. You have to pay for their full service, but take advantage of their free trial to see the benefits for your company. Tracking your credit line accounts can be a business onto itself, so take the Trade Credit Express tour to see whether outsourcing trade credit would be more efficient that in-house credit granting.

Protect your profits with trade credit insurance

Unforeseen 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.

I recommend: Calculate the monetary benefit of trade credit insurance with the Credit Insurance Cost/Benefit Analysis calculator. If you determine that it's economically beneficial, locate trade credit insurance providers through Creditworthy.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  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.

"Buy now, pay later" is a common principle for Americans, but with trade credit, that "later" is usually within 30, 60 or 90 days from the time of purchase. Working with trade credit requires knowledge of your company, a good relationship with the company you're dealing with as well as a strict payment schedule to maintain that relationship. Defaulting on your agreement can negate your terms.

Although you can't necessarily get trade credit right off the bat, you should strive for it as it lessens the need for capital from other sources, like banks or your own personal account. Your business, big or small, needs to be able to get some credit of trade, so consider the following:

1. Run your own business's credit report. Trade lines of credit are often based on credit reports and business relationships.

2. Figure out exactly what business trade credit terms you want and negotiate for them. The goal is for both parties to settle on agreeable terms.

3. Once you've established credit trade lines, keep current. Getting behind on your payments will cause you to lose the favorable terms you negotiated.

Action Steps
The best contacts and resources to help you get it done

Pull your business credit report before applying for trade line credit

The first step in getting credit is learning what's in your business credit report: This will give you the knowledge you need to negotiate. If you know your report is stellar but you're not getting good terms, you'll know that you're getting the short end of the stick. In contrast, if something negative is on the report, you can either try to get it corrected or expect more costly terms.

I recommend: Check out the sample reports at Experian Information Solutions to determine which report is right for your company. Equifax offers the opposite perspective: You can see what another company will be looking for when it pulls your credit report.

Understand and work out the terms of your trade credits

The terms of your credit agreement will have a major impact on your accounting. How many days you have to pay, at what interest rate and what type of fees you'll be dealing with may all be determined by your credit report and your relationship with your suppliers. The biggest thing to negotiate is how many days you have to pay: the more, the better. You have to be prepared to negotiate for favorable terms by providing reasons that you should receive them.

I recommend: Get help figuring out your terms from mortgage22.com. You can find tips for negotiating for discounts at Small Business Credit Strategies, which involve setting up multiple trade credit accounts to prove your worth.

Make a payment schedule for your credit trade lines and stick to it

Before you were offered trade credit, you most likely had to pay on delivery or in advance. If you don't have a good track record, you probably didn't get credit extended to you. You have to keep that track record if you want to keep your credit. Establishing a payment schedule and sticking with it involve both in-house and external procedures. You'll work with your accounting department as well as the company that has extended the credit to you. Maintaining a close relationship based on timely deliveries and timely payments makes for a good trade agreement.

I recommend: Discover Financial Services offers some great tips on maintaining your credit relationship with your supplier. To simplify accounting, some suppliers are using companies like Vantage Card Services to guarantee payment, so familiarizing yourself with these services can help you understand your obligations.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Don't forget about any discounts you might receive if you pay within a certain time frame. Credit trade lines often include terms like '2/10, net 30,' meaning you'll get a 2 percent discount if you pay within 10 days, otherwise, the full balance is due within 30 days. Penalties and late fees act as a sort of trade credit insurance to help make sure you don't default on this extension of credit.