Trade credit

related topics
{company, market, business}
{food, make, wine}
{day, year, event}
{rate, high, increase}

Trade credit is an arrangement between businesses to buy goods or services on account, that is, without making immediate cash payment. The supplier typically provides the customer with an agreement to bill them later, stipulating a fixed number of days or other date by which the customer should pay. It can be viewed as an essential element of capitalization in an operating business because it can reduce the required capital investment required to operate the business if it is managed properly. Trade credit is the largest use of capital for a majority of business to business (B2B) sellers in the United States and is a critical source of capital for a majority of all businesses. For example, Wal-Mart, the largest retailer in the world, has used trade credit as a larger source of capital than bank borrowings; trade credit for Wal-Mart is 8 times the amount of capital invested by shareholders.[1]

For many borrowers in the developing world, trade credit serves as a valuable source of alternative data for personal and small business loans.[citation needed]

There are many forms of trade credit in common use. Various industries use various specialized forms. They all have, in common, the collaboration of businesses to make efficient use of capital to accomplish various business objectives.

Contents

Example

The operator of an ice cream stand may sign a franchising agreement, under which the distributor agrees to provide ice cream stock under the terms "Net 60" with a ten percent discount on payment within 30 days, and a 20% discount on payment within 10 days. This means that the operator has 60 days to pay the invoice in full. If sales are good within the first week, the operator may be able to send a cheque for all or part of the invoice, and make an extra 20% on the ice cream sold. However, if sales are slow, leading to a month of low cash flow, then the operator may decide to pay within 30 days, obtaining a 10% discount, or use the money another 30 days and pay the full invoice amount within 60 days.

The ice cream distributor can do the same thing. Receiving trade credit from milk and sugar suppliers on terms of Net 30, 2% discount if paid within ten days, means they are apparently taking a loss or disadvantageous position in this web of trade credit balances. Why would they do this? First, they have a substantial markup on the ingredients and other costs of production of the ice cream they sell to the operator. There are many reasons and ways to manage trade credit terms for the benefit of a business. The ice cream distributor may be well-capitalized either from the owners' investment or from accumualated profits, and may be looking to expand his markets. They may be aggressive in attempting to locate new customers or to help them get established. It is not on their interests for customers to go out of business from cash flow instabilities, so their financial terms aim to accomplish two things:

Alternatives

Full article ▸

related documents
Economy of Vanuatu
Economy of the Central African Republic
Economy of Mali
Dow Jones & Company
International Finance Corporation
Economy of Bermuda
Economy of Nauru
Startup company
Economy of Guatemala
Hilton Hotels Corporation
Ernst & Young
Daimler AG
Management accounting
ITT Corporation
Economy of Saint Lucia
Economy of Costa Rica
Volkswagen Group
Perestroika
Economy of Seychelles
Economy of Austria
Economy of the Federated States of Micronesia
Corel Corporation
Frito-Lay
International Development Association
Economy of Syria
TeliaSonera
Tragedy of the anticommons
W H Smith
Fujitsu
Economy of Liechtenstein