Trade credit is a great short-term financing solution for both new, and established businesses. It can help to build strong relationships between purchasers and suppliers, while eliminating the need to involve a bank or financial institution.
The practice of trade credit is the largest use of capital for the majority of business-to-business negotiations in the United States. Yet there are important pros and cons that should be considered by both parties involved before deciding on this type of business financing.
As previously mentioned, trade credit is a great short-term financing solution – particularly if the purchaser is a new start-up business getting off the ground. However, on the flip side, it poses a higher risk for the supplier, given the lack of reliable payment history the purchaser is currently unable to provide. So depending on which side you’re on, it could be a good or a bad scenario.
But in the opposite scenario, a supplier could be on the start-up side, who has gained an opportunity with a large corporation. Yet with payment terms being on average of 60 days or sometimes longer, that could mean the difference between hiring new employees, or cutting labor hours in half.
On the plus side, trade credit is usually very simple to arrange, and is much cheaper than other alternatives (eg. loans with high interest rates or overdrafts, etc.). Not to mention, your business will always stay 100% your business, at all times.
But on the downside, the risk is not only limited to potentially damaged relationships, but you may also risk tarnishing your reputation, which in turn inhibits the validity of your business.
Basically, with a “buy now, pay later” narrative, trade credit is almost like a gamble based on industry performance, the demand of goods and services, and the financial standings or “good faith” of who is able (and willing) to participate.
To learn more about the pros and cons of trade credit, contact Eagle Bend Capital Financing today and find out if it’s the right option for you and your business.