There are many types of trade credit, but before we delve into them, let’s define what trade credit is. Trade credit is a short-term agreement where a supplier extends credit to a buyer when the latter purchases goods for resale. It differs from long-term credit, consumer credit, or installment sales. Trade credit plays a significant role in financing many projects, especially for businesses that may not have easy access to other funding sources.
What Are the Main Types of Trade Credit?
1. Monthly Payment
This is the most common type of trade credit, typically used in business activities where transactions are numerous. In this arrangement, the supplier ships orders to the buyer throughout the month. Tracking cash discounts for each invoice becomes impractical, making it more efficient for the buyer to make a single payment at the end of the month.
2. Seasonal Payment
In this type of trade credit, the supplier issues an invoice with a date later than the shipping date of the goods. This encourages the buyer to place orders for seasonal goods before the sales season begins, allowing the supplier to gauge market demand and manage production accordingly.
3. Cash Terms
Although this type requires payment in cash, it still allows for a short credit period. Cash terms, despite their various forms, generally mean that the buyer is granted a brief period starting from the invoice date. The purpose of this period is to allow the buyer to review the invoice and inspect the received goods.
4. Standard Terms
These terms grant the buyer a specified period from the invoice date to make a payment. If the buyer pays within a short timeframe during this granted period, they are eligible for a cash discount for early payment. This brief period encompasses shipping time and provides the buyer with an opportunity to examine the goods against the invoice before payment.
Other Types of Trade Credit
There are other types of trade credit that may not be considered true credit in the full sense due to the significant risks involved, such as cash payment before delivery or cash on delivery. In these cases, the supplier has little to no information about the customer, or the customer’s reputation may be questionable. Consequently, the seller may only ship goods after receiving payment.
Conclusion
To learn more about the types of trade credit and gain insights into the functions of credit in banks, credit documentation, and loan recovery, you can register at the British Academy for Training and Development. This is especially beneficial for those interested in various banking operations.
