All You Need to Know About Trade Finance
Extending credit to customers has been going on since the beginning of business. When a supplier is dealing with another business, this type of credit is known as trade finance. A business who sells the products that another business needs to conduct its operation will sometimes allow businesses a period of time to pay for what they buy. Similar to the extending of credit to consumers in many retail stores, this type of credit allows for the potential of increased sales to suppliers of businesses. Businesses who offer to allow customers to pay on terms can sometimes have a competitive advantage over those that require cash only.
Different terms are offered for trade finance, but a common structure is known as net 30. This method requires that the purchasing company pay the amount owed within 30 days of receiving whatever goods it purchases. If the company buying products or services pays its bill within 10 days, it will sometimes receive a 2% discount. However, by paying in full within the agreed upon 30 day time frame, the company buying products will be able to maintain a good credit rating and reputation with the supplying company. Oftentimes, a company’s creditworthiness and reputation can save it when going through tough economic times.
The main advantage for the company that extends credit is helping itself to build a larger base of loyal customers. Since business is all about taking risks, many companies want to use a supplier’s products to earn a profit before paying for the products. This helps the company doing the buying with its cash flow. Every company has to have enough cash on hand to meet daily operating expenses and pay its employees. If it falls short of this capital, it will usually stop operations. By having access to trade finance to purchase supplies, many companies can free up required operating capital.
With more daily operating funds, many businesses can increase their sales efforts and earn more profits. By extending credit, the suppliers of these companies help them to succeed and usually build loyalty in the process. By establishing this bond of trust and appreciation through extending trade finance, the supplier can help ensure that its customers will not be easily lured away by a competitor offering lower prices. A strong relationship can be formed between the two companies that represent a true partnership. When both the supplier and purchasing companies view each other as vital to success, the bond between them can be hard to break.
