Working with Trade Credit

Learn how to get and maintain favorable terms when dealing with trade credit in business

"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.

 

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.
Try: 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.
Try: 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.
Try: 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.

 

• 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.

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