Trade Credit Key Terms

Learn how trade credit can help businesses

Trade credit is a process of buying necessary equipment, supplies or inventory for a business. Trade credit accounts from suppliers help to finance the purchases with a "buy now, pay later" approach. Sometimes trade credit is also referred to as an open account, because a business can regularly use trade credit for more supplies as long as payments continue to be made on time. Specific finance terms are created according to a company's credit application.

 

Business credit

Business credit is a way the financial industry deems a business credit-worthy. Using trade credit to set up a business helps to build business credit.
Try: Nevada Corporate Headquarters provides tips on how to build good business credit.

Cash/check on delivery (C.O.D.)

Cash on delivery is a common method used when ordering business supplies if a business has not built any credit with the suppliers. A business can work out terms for a trade credit deal if a number of C.O.D. transactions are successful.
Try: WiseGeek provides an expanded definition of C.O.D. payments.

Net 30, net 10 accounts

Net 30 or net 10 accounts are trade credit accounts that provide an allowance of 10 or 30 days for a business to pay the full amount of the purchase after goods are delivered to the retailer.
Try: Worldwide Brands provides a video that gives details on net 30 accounts between businesses and suppliers.

Cash discount

With trade credit accounts, some vendors will offer cash discounts if the business pays ahead of schedule. For example, if a business pays in full within 10 days on a 30 day account, it can receive a 1% discount noted on the invoice as "1/10, net 30."
Try: Entrepreneur Magazine provides an overview of trade credit and how discounts can reduce overall costs to a business using trade credit accounts.

Working capital

Working capital is a measurement of a company's financial health. Working capital is determined by the current assets subtracted from the current liabilities. Using trade credit reduces the amount of working capital needed for a business.
Try: Investopedia provides an expanded definition of working capital and how businesses can measure the amount of working capital.

Letter of credit

Another way to begin a trade credit relationship with a supplier is to provide a letter of credit. This document is issued by a financial institution and can prove creditworthiness to a business with no previous trade credit accounts.
Try: The Credit Research Foundation provides information on understanding and using letters of credit in trade businesses.

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