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Why Small Businesses Extend Trade Credit

You might not understand why a business offers trade credit. After all, doesn’t it seem like a bad business move to give someone a product or service before they pay you the money? Well, it’s not as crazy as you’d think. In fact, for some businesses, offering trade credit is just what keeps their business alive. Here are 7 reasons why companies extend trade credit (and maybe why your business should be doing so too):

1. It’s Industry Standard – Frankly, in some industries, trade credit is standard. In order to survive, businesses have to do as their peers do. Here are a few industries where trade credit is the norm:

  • Staffing
  • Construction
  • Manufacturing
  • Wholesale trade
  • Distribution and textile/apparel

2. Business Growth – Sometimes, if you’re a business wanting to secure a contract with a bigger business, you will have to accept payment on their terms. Larger businesses tend to have their own payment terms they require. Unfortunately, they are large enough to know if you won’t say yes to those terms, someone else will. That being the case, many businesses have to offer trade credit just to secure a new job. Growth of the business is worth the risk and larger companies tend to be less risky.

3. Beat Out the Competition – On the other side of that, some businesses offer trade credit to  remain competitive. Simply put, if a customer has to choose between a business who offers flexible payment terms and a business who doesn’t, given the service and price is comparable, they will always choose the one extending credit. Therefore, some businesses extend credit to get a leg up on their competitors who are not.

4. Increase Sales – Not only can trade credit help you win a customer but it can also help increase the volume of your sales. If a customer has more time to pay, it naturally increases their buying power. With more time, they purchase more, which means larger sales for you.

5. Financial Stability – Extending credit is not a choice for businesses in tough financial times. Having a healthy cash flow is a must for businesses who want to extend trade credit. Therefore, if you are offering terms, you are telling people you’re business is in a good position financially. A strong financial reputation comes in handy when applying for loans or even when looking for suppliers to buy from.

6. Pride – If you are willing to provide a product or service prior to accepting payment, you are telling your customers and potential customers that you believe in the quality of what you are selling. You trust your product will make your customers happy. This sends a clear message to buyers and helps build product integrity.

7. Say Thank You – If you are extending payment terms to customers, you are saying you trust them. Offering trade credit can be a great way to show appreciation to long-term, loyal customers. If you aren’t extending credit to all of your customers, you should consider doing so with your loyal customers. It’s an excellent way to say thank you for their business.

The question really shouldn’t be why companies extend credit but rather whether or not trade credit is right for you. If you already offer trade credit, what benefits do you see from employing it? If you are not, do you believe it would be a good fit for your business? As you can see, trade credit is a great business opportunity for certain businesses. It’s time to evaluate what it means (or could mean) to offer it.

Meredith WoodDirector of Community Relations, Funding Gates
Meredith is the Director of Community Relations at Funding Gates, the world’s first CRM for receivables management. An avid small business writer, Meredith’s work can be seen on American Express OPEN Forum, the Small Business Bonfire, YFS Entrepreneur and many other small business sites. | Facebook | @FundingGates | More from Meredith

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Discussion (4) Comment

  1. Meredith WoodAuthor

    That’s really great to hear Peter. Perfect example of how credit entices buyers to choose one business over another.

  2. Peter WiemerVisitor

    We own a Seasonal Tourism Business, We Wan Chu Cottages here on Chautauqua Lake, New York. We can relate to Businesses needing and extending Trade Credit.

    You can’t declare something cross platform that will work for everybody in extending Credit but from a Tourism Seasonal Business, we do Business with local Businesses like Chautauqua Brick (Lumber yard) which give us 30, 60, 90 days with 1.5% interest after 30 days, no problem. But the ones that do not extend Credit, even for 30 days are not seeing our monies if at all possible.

    And we pay all off all of our Bills by July or August and have done so with a lot of others for more then 40 years. Some get it $$ (the ones that extend credit) and some don’t…

    Have a Great Day & Hang Loose… Peter Wiemer

  3. Meredith WoodAuthor

    Excellent advice Bradford! I really like #5.

  4. Brad MarcusVisitor

    Businesses who extend credit should do it intelligently not to everyone
    but to only businesses who are credit worthy. Credit references are usually a waste of time because they are their best clients, best friends and family members. In most cases you know the answer before you make the calls.

    Every business who extends credit should have a credit application or new account form which contain terms. These are there to protect your business and reduce disputes. I wrote the article below to help our clients to better protect themselves.

    Terms to include on your Credit Applications, New Account Forms & Purchase Orders

    In addition to stating what precisely your credit policies are, i.e. under what terms they will extend credit & exactly what their terms are when credit is not approved… card, COD, deposit, etc. you should
    consider adding some or all of the following terms:

    1. No returns without written authorization.
    2.No returns accepted after X (7-10) days.
    3.Restocking charge
    4.Interest charge on past due invoices.
    5.Should an invoice be sent to a collection agency, the debtor will be liable for any fees charged to collect that debt including legal.

    Current clients need to be informed of any changes in your credit policy and acknowledge receipt or they need to fill out a new credit application and sign it.

    Get a personal guarantee whenever possible

    Bradford Marcus
    The Atwell Companies
    516-622-9030 ext 341


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