What Are Some Advantages and Disadvantages of Trade Credit?

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The greatest advantages of trade credit to businesses include the availability of zero percent financing and potential discounts on needed goods, while the biggest disadvantage is the risk of late payment fees. Trade credit is an arrangement between a supplier and a business to receive goods or services while delaying cash payment until a later date.

Suppliers offering trade credit to businesses generally express their terms in a three digit shorthand, such as ?2/10/30.? In this example, the business receives a two percent discount on the goods received if the balance is paid in full within 10 days. The last number signifies a 30-day net due date. This arrangement is advantageous for small businesses, as a two percent discount on needed goods or services can add up over the fiscal year. In effect, the supplier is offering the business financing at zero percent interest in addition to the possibility of a discount for early payment. Not all suppliers offer an early-payment discount, however.

There are a few notable pitfalls to using trade credit. Any time credit is used, the buyer runs the risk of being unable to pay the balance when the bill comes due. A business using trade credit runs the risk of paying delinquency fees on past-due balances. The fees may be small, but even a one percent fee paid monthly adds up over the course of time. Another disadvantage of trade credit is that most suppliers do not offer it to startup businesses, at least until the business proves its dependability.