| |
| |
|
Credit Information |
|
|
|
Trade Credit: How to Determine if You Should Offer Net-30 Terms to Your Customers
What is trade credit? One of the major differences between consumer and commercial transactions is that most, if not all, consumer transactions are paid in cash or by credit card at the time of sale. Because of this, most consumer businesses never have to worry about extending credit to a customer and can run their operations on an "all cash" basis. This allows them to focus on their core competencies because they don't have to carry slow paying Accounts Receivables and go through the expense of collecting on such accounts. However, commercial transactions are different. Most clients ask their suppliers to deliver services immediately and then to invoice them for the work, payable 30 days later (also known as offering net-30). In effect, clients ask their suppliers provide them with "trade credit" for 30 days. Although suppliers don't like offering trade credit, most have accepted it as an industry standard and have learned how to operate and live with it. In fact, some suppliers have even mastered how to offer trade credit and use it to better position their companies with leading clients. Large creditworthy customers, such as the government or large companies, will usually demand trade credit as part of their contract negotiations. Some examples of entities that ask for 30 to 60 day payment terms are: o Fortune 500 companies On the positive side, providing trade credit to the proper clients can be a tool that allows your company to win important contracts and position it for growth. However, providing credit is also risky and can erode the company's cash position if it is misused. Furthermore, offering trade credit to less-than-creditworthy clients can burden the company with bad debt and affect its growth prospects. Because of this, business owners must walk a fine line balancing their desires to grow their businesses with the necessities of offering credit to their customers. Keys to providing trade credit successfully The best way to minimize the risk of providing trade credit to a client is to perform a credit analysis on him. Although no credit analysis is 100% perfect, they allow business owners to make an informed decision on whom to issue credit to. Here are the three key points to making a credit analysis. o Have the customer fill out a credit application o Check bank and supplier references o Check commercial credit reports Doing a credit analysis on your clients will allow you to determine how much - if any - trade credit you can give them. Clients that do not have a favorable credit analysis should be placed on a COD (Cash On Delivery) basis, at least initially, to reduce the risk of non-payments. The challenges of offering trade credit One of the main drawbacks of providing trade credit is that it can create a cash flow problem for the company that offers it. Large suppliers with adequate cash cushions in the bank can easily afford to offer credit. However, small suppliers with lean bank accounts usually find that offering credit will drain their cash resources and create financial challenges. It is not uncommon for small businesses to find themselves with a cash flow gap after offering trade credit to their larger clients. This gap is created by the fact that the company's Accounts Receivable account is strong while the company's bank accounts and cash position are weak. The cash flow gap places the business at risk of missing payroll and debt payments. It also prevents it from pursuing new opportunities because they don't have the funds to buy resources or hire the necessary staff.
Bridging the "cash flow" gap The biggest asset that most new businesses have, aside from their equipment and intangibles (e.g. employees), is their unpaid invoices or Accounts Receivable. Accounts Receivable is an asset that can be quickly converted into cash by using a financial tool called factoring. Factoring allows a business to sell the financial rights to their Accounts Receivable to a third party, called a Factor. As part of the sale, the factor immediately advances a large portion of the cash value of the unpaid invoices to the business. The business can then use this cash infusion to strengthen its cash position and meet its obligations. In the meantime, the factor, which now owns the invoices, waits to get paid by the customer. Factoring enables business owners to outsource their trade credit function to the factor and to turn their companies into the equivalent of an "all cash" business. If you want to learn more about factoring and how it can be used to grow your business, please read our white paper titled "Factoring: Cash on Demand for your business without debt or loans" About Marco Terry Marco Terry is president of Commercial Capital LLC, a leading commercial finance company that specializes in providing working capital through factoring to small businesses. For more information or a free consultation, please visit our web site at http://factoring.ccapital.net or call us at (786) 206 4722.
MORE RESOURCES:
Credit - Google News |
|
|
|
RELATED ARTICLES
The Ghost of Expected Surprises Here, Cratchet, what do you think you're doing?Uh, er, leaving sir.Leaving? It's 5 minutes to the hour. Types of Credit Cards There are a whole variety of different types of credit cards available which can make choosing the right one a very confusing experience. In order to help you decide, listed below is a useful breakdown of the various types of credit cards available. Inflexible Friends and Plastic Assets, Why Money isn't Buying Love Anymore Consumers reject financial advice in favour of financial frivolityIt would appear that even though their "friends" aren't as flexible as they used to be, consumers are still stretching their credit cards beyond the comfort zone.The vicious circle of debt manipulation involving banks, consumers and commercial credit companies is putting consumer spending under strain, as funds begin to dry up. Have You Checked Your Permanent Record Lately? As a young student I feared getting bad grades because I didn't want any bad marks on my "permanent record." Get an "F" in fifth-grade science and it goes in your record. How Businesss Mess Up Their Credit Policies In "Become the Squeaky Wheel" a book recently published, Michelle Dunn demonstrates the major areas a business should focus on to ensure a satisfactory customer experience.One mistake business owners make is not having a credit policy in place when they open their business. Why Consumers Need a Nationwide Credit Freeze NOW What do a shoe retailer, an online discount broker, and a popular clothing retailer all have in common? All three - DSW Shoe Warehouse, Ameritrade, and Polo Ralph Lauren - sustained breaches to their customers' accounts. Unfortunately, these three are not alone when it comes to security breaches. The Exact Action To Take When You Find Errors In Your Credit Report There are times when you may be turned down for credit and you do not understand why.According to the Fair Credit Reporting Act you are entitled to a free copy of your credit report if you have been denied credit because of negative items on your credit report within 60 days of the request for credit, if you are unemployed but looking for work, are on state benefits, or believe that your credit report is incorrect because of fraud. Five Credit Card Billing Problems and How to Fix Them It goes without saying that your first and best defense against paying fraudulent or unfair charges on your credit card is knowing what your bill says! When you receive your credit card statement each month, sit down with it and check each item to make sure that you actually DID purchase it. If you do run into inaccuracies or problems, there are procedures to follow to report and deal with the charges. A Cure for an Ailing Credit Credit has become a much-used word, thanks to the various connotations that it is being used in. Transactions in which the payment is deferred to the near future are termed as credit transactions. Learn How to Improve Your Credit Score Having a damaging credit record can hurt you in many ways. It may prohibit you from making an important purchase such as a home, car, computer or vacation. Trade Credit: How to Determine if You Should Offer Net-30 Terms to Your Customers What is trade credit?One of the major differences between consumer and commercial transactions is that most, if not all, consumer transactions are paid in cash or by credit card at the time of sale. Because of this, most consumer businesses never have to worry about extending credit to a customer and can run their operations on an "all cash" basis. Stop Struggling Because Of Poor Credit And Improve Credit Rating Now Did you apply for a personal loan only to be turned down by a bank or lending institution? Like most people there is always a need to borrow money to buy a car or to renovate a home or even to get a student loan. There are many reasons why people need a loan and lenders turn people down from a loan application based on ones credit rating and credit score. Bad Credit Loans For Those Who Seek Alternatives for New or Old Car You can still save money on a Bad Credit Loan by comparing rates, checking out multiple policies, and negotiating with lenders.Getting a Bad Credit Loan doesn't have to be like basic training. Making Sense of the Information in Your Credit Report If you've ever applied for a credit card or loan, you've probably had your credit report reviewed by the lender. Your credit report has a huge impact on your financial future, so it's well worth your time to be sure that you understand what your credit report says about you. ChexSystems: Alternative Options for People Whove Been Checking Accounts Individual banks elect to become members of ChexSystems, and to use their services.Those individual banks are the ones who decides what is sufficient cause to close your account and report you to ChexSystems. Secured Credit Cards- Consumer Tips Whether you have no credit or damaged credit, secured credit cards are a good tool for building a good credit history.Several months ago Tom, a member of CreditBoards. Rewards Cards - Are They Right For You? Rewards cards have become the latest rage in the credit card industry. In the past, consumers shopped for credit cards that offered the lowest interest rate. Choosing the Best Low Interest Credit Card With so many low interest credit cards on offer, how do you know which one to choose? Here is a brief guide for choosing your low interest credit card.The Chase Manhattan MasterCard is a great choice, for those with an excellent credit rating. Why Should You Use Credit Cards Believe it or not, the way society, especially the commercial side, is set up these days, the only alternative to using credit is to pay cash for everything. But it's actually quite hard to do that. Keep Your Credit History Clean - Remove A Negative Credit Record From Credit Report The three major credit bureaus, Experian, Equifax and Trans Union are similar and feature a "Credit Score", which is created from credit report data submitted to them about you.But very often your credit report includes inaccurate, wrong or incomplete information (credit records).
|
| home | site map |
| © 2006 |
