Trade credit – who can benefit?
Trade credit is granted between entrepreneurs. The product’s premise is to defer the payment deadline for the purchased goods. What are the benefits and risks of a credit? You will learn about it in the article below!
What is a trade credit?
The trade credit is a non-bank product. Is granted between enterprises. The essence of the loan is to defer the payment for the goods or services purchased. A trade credit is also called a trade credit or trade credit. It is an alternative to loans and credits for companies.
There is no legal act that would regulate this type of loan. The agreement between the parties may be confirmed in writing or by a specified payment date on the invoice. The payback time varies. It usually ranges from a few days to a month.
There are two forms of trade credit:
- recipient credit (down payment) – the business partner pays the advance after receiving the good or service. If he fails to pay the due date, the money will be forfeited;
- Supplier credit – the seller postpones the payment deadline for the purchased goods. An individual payment deadline is set for each contractor. The so-called. the loan period should depend on: the amount of the loan, the financial condition of the lender, the course of cooperation, etc.
What conditions must be met to use a trade credit?
There are two methods of granting trade credit – system and individual. The first group groups contractors into categories to which credit terms are assigned. In the second, the borrower’s creditworthiness is checked. The most important condition for using the deferred repayment date is repayment capacity. Trust in the contractor also plays a big role.
Trade credit – benefits
A trade credit is a good alternative to a cash loan or business loan. This solution is used by young enterprises that do not have sufficient liquidity. A commodity loan is the cheapest loan available on the market. An important factor for this product is the discount.
For the borrower, the biggest plus is maintaining financial liquidity. Because the borrower purchases the goods and defers the payment date. Then he sells the products he purchases and repays the liability for the funds obtained.
Also during the repayment period, the borrower may dispose of someone else’s cash. If he is in a worse financial situation, he does not have to incur liabilities in financial institutions. By contrast, suppliers can increase sales and profits by granting commodity loans. What’s more, this allows you to acquire regular customers.
What is the discount?
The discount is a percentage reduction in the price for the goods. The discount applies if the buyer repays the liability earlier than foreseen in the contract. The discount is completely voluntary. In order to check whether the use of the discount is profitable, you should compare the discount to a trade credit. The easiest way is to use the formula:
The discount amount is set by the lender. If the borrower is reliable and has repaid his previous obligations on time, he is more likely to receive a discount.
Important – the discount has an impact on the basis and amount of VAT.
Threats arising from trade credit
The main threat to commercial credit is the fact that it can be granted to an insolvent entity. The matter of outstanding claims can be transferred to a debt collection company. However, you should be aware that field debt collectors have little authority – including they may not carry out environmental interviews or enter the debtor’s apartment or premises.
One way to recover is through court proceedings. Sending a case to a civil court involves fees. It is 5 percent on total debt. The court then issues an enforceable title. Under it, the bailiff recovers debt.
A creditor armed with a court enforcement order may enter the dishonest borrower into the National Debt Register or the National Register of Insolvent Debtors. According to KRD data, 53 percent debtors with arrears of payments not longer than a year, regulates the obligation after receiving a warning about the possibility of being blacklisted.
A significant threat to the lender is the amount of liabilities granted. If the entity grants them too much, it may lose liquidity. If the borrower is late with paying the invoice, there is a possibility of using factoring.
Summary of trade credit threats:
- insolvent borrowers,
- too many loans granted.
What to look for when granting a trade credit?
A well-structured contract should be the key safeguard. In the case of debts over PLN 500, it may be difficult to recover a claim in court that has not been confirmed in writing.
If the lender does not trust the borrower, he should assess his creditworthiness. To do this, check the debtors’ databases (e.g. KRD, KRDN). Moreover, it is worth verifying the KRS of the lending entity. The necessary information can be found on the website of the Ministry of Justice. However, if the borrower is a sole proprietorship, you need to examine the base of sole proprietorship in the Central Business Register and Information (CEIDG).
One of the collaterals is trade credit insurance
One of the collaterals for the deferred payment is insurance. At the time the policy is launched, the insurer will deduct 20% own contribution. The main essence of this type of insurance policy is to receive compensation in the event of non-repayment. As part of the services provided, TU also checks the financial situation of the contractor. The borrower also receives support in the case of debt recovery. The price of the policy depends, among others on the amount of the loan granted and the industry in which the insured entity operates.
The loan may be secured by interest. They should be included in the contract. The subscription forces the borrower to pay back. The borrower may also issue a promissory note or request collateral in the form of movable or immovable property.
Trade credit collateral:
- insurance policy,
- A promissory note,
- surety of movable or immovable property,
- Bank guarantee.
Can a trade loan be included in the cost of business?
If the product purchased on credit is used for the needs of the company, it is possible to enter the liability (together with interest) in the cost of business activity. The invoice should be the document confirming the transaction. The cost will be recognized only after payment of the amount due.