Trade credit is a concept seen in businesses. Trade credit is an understanding between businesses to buy services or goods. Trade credit is made without making instant cash payments. In trade credit, the supplier will provide a customer with agreement to bill them afterwards. This will be done after stipulating a fixed number of days by which the customer should have to pay. It can be viewed as a vital part of capitalization in operating business. This will lessen the requisite capital investment to run business, if managed properly. It is the largest use of capital for most of the business to business. For B2B sellers, trade credit can be highly beneficial. To quote an example on Trade credit, Wal-Mart which is the largest retailer, they have used this as their largest source of capital, more than bank borrowings. In Wal-Mart It is 8 times the amount of capital invested.
Trade credit is valuable for many people. It helps borrowers in the developing countries. Trade credit is an alternate source for business or personal loans. It can be found in many forms. Many forms of trade credit are used now commonly. It is used by many industries in many specialized forms. What is common in all these is well-organized use of capital to achieve a variety of business objectives.
This is a process where supplies and buying tools for your business start up from vendors or suppliers, letting them finance your purchases. It is the process of buy now and pay later. It is also called open account. This is called open account because they keep your account open and you can acquire from them on credit as long as you make payments on a regular basis.
As an example for Trade credit: we can go to an office materials business and start an account and can buy furniture required for office, office supplies, computer etc. The vendor at the shop will require filling some forms by the buyer of the products. The forms for credit application have to be filled. It can also be used to get inventory for your start up business. This is known by the names open account and vendor credit. It is one of the best methods of displaying cash flow in a retail business. It is a process where you can build business credit. It is an open account. It creates additional money resources there by delaying money outflow that would occur at the time of purchase. It is best when used as a short term solution for managing money flow and shouldn’t be used for long term.
Thus trade credit is an instrument by which we can build our businesses. Particularly for small business units, trade credit can act as a sales booster. So it is better to utilize this financial object while you do business. Your inventory management also will be easier with it.