What is Trade Credit and How Can I Manage It?
What is trade credit?
Trade credit allows businesses to purchase goods or services from other businesses (often in bulk and over a period of time) and pay at a later date or upon regular intervals. Sometimes known as buying on account, this leads to a far smoother way of doing business in certain sectors but it can also introduce an element of risk, particularly in new business relationships. Upon various satisfactory checks, the supplier will create a credit account for their client which will be used to manage day-to-day transactions between the two businesses.
How can you discover if a company is creditworthy?
There are a variety of methods for establishing the creditworthiness of a potential client. As well as doing your own research - such as checking out the Companies House website or getting information from a credit agency such as Experian - you can also seek references from banks or other suppliers of the client. This can help to assess the risk of providing trade credit in any particular case. Obviously the more credit being offered, the more important it is to ensure that you won’t be left in the lurch when the time comes for payment.
Have you checked authority to contract?
Remember to check that the person you are dealing with actually has the authority to negotiate on behalf of their organisation, particularly when you’re agreeing on any important business terms with a new client. It may be difficult to enforce a contract if one party does not have the required authority to bind their company.
How can you reduce the risks of offering trade credit?
The wide range of options and methods available for reducing the financial risks involved in providing trade credit should be considered before dealing with a new client. Some basic checks and relevant documentation put in place at the start of a new business relationship can save a lot of time, hassle and expense in the long run.
Have you got a decent set of Ts and Cs?
Whenever you offer trade credit, you should make sure you have a properly drafted set of terms and conditions. Using suitable Ts & Cs will ensure that both parties are fully aware of their rights and obligations.
Have you considered directors’ guarantees?
You can ask a director, parent company or another party to provide a guarantee for the payment of any debt. This adds another layer of security.
What about retention of title clauses?
Retention of title clauses can allow you to transfer possession of goods which have not yet been paid for whilst, at the same time, retaining the essential legal ownership of the goods until your client has settled their debt.
A variety of documents which can help with the management of trade credit can be downloaded from our Business Documents Folder. Click on the title of any relevant topic below for further information.
- Discovering creditworthiness of companies
- Checking for authority to contract on behalf of a company
- Reducing the risk of offering trade credit
- Terms and conditions of trade credit
- How to apply terms and conditions
- Obtaining guarantees from directors and trade credit
- Retention of Title Clauses