CFO’s: What’s the difference between trade-credit and extended payment terms?

You know, there’s a common myth floating around that trade credit is just about pushing back payment dates. But really, it’s so much more than that. Think of it like building a bridge between suppliers and their customers, where everyone gets to cross with ease. It’s not just about delaying payments. It’s about creating a solid system that benefits both sides, giving them the financial wiggle room they need and cementing trust along the way.

As CFOs and finance leaders, getting the hang of this difference is pretty crucial. Think of trade credit not just as a lever you pull to make things easier in the short term. It’s more like a Swiss Army knife for your business relationships, unlocking real growth and loyalty from your customers. It lets your business customers breathe a little easier, knowing they have the space to manage their cash without the immediate pressure to pay up.

Sometimes, people think that just stretching out payment terms is doing the same job. But that’s missing the whole picture. Trade credit isn’t just about putting off payments. It’s about setting up a system that supports the financial health and goals of everyone involved.

Let’s dig a bit deeper into why trade credit is such a game-changer.

Trade credit and extended payment terms might appear interchangeable at first glance. But they are not. 

At first glance, trade credit and extended payment terms might seem like twins. But they’re not. The real difference comes down to how they’re used in your relationship with your customers. Trade credit is like a handshake agreement but with homework done upfront. You’ve checked out your customer’s financial health, ensuring they’re good for it. Conversely, just bumping the due date doesn’t give you that same level of insight or security. Without looking into their financial standing, you’re left guessing, and who likes surprises in business, right?

The distinction lies in their strategic application and impact on business relationships. While both trade credit and extended payment terms facilitate deferred payments within typical durations of 30, 60, or 90 days, trade credit establishes a formal, vetted relationship between the lender and borrower. In contrast, extending payment terms merely adjusts the payment due date without a deep dive into the customer’s ability to repay. This approach lacks the thorough vetting of the customer’s creditworthiness, leaving the lender without insight into the customer’s financial history or business practices and, consequently, without assurances of repayment.

As a lender, the strength of your relationship is formed on what you know about the borrower. This includes credit history and other relevant information like how many directorships they hold, how many of those have been liquidated, and so on. 

In short: are they good to pay the money back? 

Trade credit allows businesses to optimise their working capital by aligning cash outflows with their revenue generation. From a relationship standpoint, offering trade credit signifies trust and commitment to your customers, fostering a stronger, more collaborative partnership. It encourages repeat business, as customers will likely prioritise suppliers who provide them with financial leeway.

When customers know they can rely on a supplier to offer payment terms that match their cash flow needs, they are more likely to increase their order size and frequency. This not only boosts sales but also cements long-term relationships, as customers tend to stick with suppliers who understand and accommodate their financial situations.

The strategic offering of trade credit can also serve as a competitive edge. In markets where cash upfront is the norm, the ability to buy on credit is a strong differentiator. This flexibility can make a supplier the preferred choice over competitors, attracting a broader base of trade customers. 

From the perspective of cash flow management for customers, trade credit is invaluable. It allows them to align their purchases with their own sales cycles, improving their liquidity and enabling them to operate more efficiently. For instance, a retailer can stock up on inventory before a high-sales season without depleting cash reserves, paying the supplier after revenues have been realised. 

Moreover, trade credit facilitates market expansion by making products and services more accessible. Businesses that may not have the upfront capital to invest in necessary goods or services can still procure what they need through trade credit. This accessibility can open up entirely new customer segments for suppliers, including startups and smaller businesses that traditionally face barriers to entry due to limited cash flow.  

The 3 Big Benefits of Offering Trade Credit 

Trade credit is a strategic financial tool that offers several key advantages for businesses, particularly in terms of sales volume, economies of scale, brand expansion, and derisking lending. Here’s how these benefits play out:

1. Derisking Lending

Trade credit also plays a crucial role in derisking the lending process. By thoroughly vetting potential borrowers – examining their credit history, any security interests registered against their assets (PPSR), and their track record as business operators (including directorships and history of liquidations) – businesses can make informed decisions about whom to extend credit to. This comprehensive evaluation helps avoid lending to high-risk entities. This includes those prone to ‘phoenix’ activities, where a business is intentionally liquidated to avoid paying debts, only to re-emerge under a new guise.

Understanding the borrower’s financial health and ethical standing in the business community allows a lender to manage risk effectively. This ensures that trade credit is extended to reliable, creditworthy partners. Larger orders from trade customers increase sales volume and enable businesses to achieve economies of scale. This benefit is crucial in reducing the per-unit cost of production, which can significantly improve profit margins. When a business can spread its fixed costs over larger units, the cost savings can be substantial.  

2. Increased Volume Sales

Trade credit is a catalyst for boosting sales volume and revenue. By having the systems in place to check who you are lending to, businesses can encourage trade customers to place larger orders than they might under strict cash-on-delivery terms. This is particularly advantageous for companies with the capacity for large-scale production and distribution, as it can lead to more substantial, recurring orders and contracts. Plus, the assurance of payment through trade credit enables suppliers to plan and manage their production and inventory more efficiently, fostering a growth cycle and reliability between the supplier and trade customers.

3. Brand Expansion

Engaging with trade customers, especially those well-established in their markets, offers an invaluable opportunity for brand expansion. These customers often have extensive distribution channels and a solid customer base, which can introduce a business’s products or services to a wider audience. Moreover, being associated with reputable trade customers can enhance a business’s brand reputation by association, further solidifying its position in the market. This form of indirect marketing is particularly effective in reaching segments of the market that may be difficult or expensive to access through traditional advertising channels.

Implementing Trade Credit Effectively

Implementing trade credit effectively is crucial for maximising its benefits while minimising associated risks. Two key areas require focused attention: risk assessment and management, and integrating technology and systems.

Trade-Credit Risk Assessment  

Assessing Customer Creditworthiness

A thorough assessment of the customer’s financial health is essential before extending trade credit. This involves analysing their credit history, financial statements, and cash flow projections. Additionally, checking references from other suppliers and reviewing any public records for past financial difficulties can provide insights into the customer’s reliability. Tools like credit scoring models can also offer a quantitative measure of credit risk.

Understanding Beyond Credit Ratings

It’s one thing to know your customer’s credit rating, quite another to truly understand who they are. Credit ratings are essential, but they’re just a snapshot, a glimpse into a company’s financial reliability at a given moment. Your customer’s story will evolve with their business, so also staying engaging and actively monitoring how they’re doing is important.

Managing Credit Risk 

Diversifying the customer base can mitigate the risk of significant losses if a single customer fails to pay. Setting credit limits based on the customer’s creditworthiness assessment helps control exposure to bad debt. Moreover, obtaining security interests or personal guarantees, especially for more extensive credit lines, can provide an additional layer of protection.

Technology and Systems for Trade Credit

The traditional concerns about manual processes, risk exposure, and the administrative burden can deter many from leveraging trade credit’s strategic advantages. However, the narrative changes dramatically with technology solutions like 1Centre, designed to simplify and secure the entire trade credit process from the ground up.

For those at the start of their trade credit journey, the key is not just about adopting a new system but launching with a solution that covers every aspect of trade credit management effortlessly. 

Trade Credit SaaS, very sassy! 

1Centre’s platform is crafted for businesses venturing into trade credit, providing an all-in-one suite that automates customer onboarding, credit checks, and ongoing account management. It’s about giving you the confidence to offer trade credit by ensuring you have the right tools to manage it efficiently and safely.

The platform streamlines the onboarding of trade customers, removing the hassle of manual entry and the risk of errors through multiple API’s, while incorporating robust fraud prevention measures. 

With features like ID verification, document authentication, and advanced data matching capabilities, it not only speeds up the approval process but also fortifies your operations against risks. This approach ensures that a foundation of trust and security supports your move into offering trade credit.

Moreover, 1Centre’s technology is built to accommodate businesses new to trade credit, offering intuitive workflows and decision automation that guides you through each step. Whether it’s managing credit applications or facilitating smooth communication between sales and finance teams, the platform is designed to make trade credit accessible and manageable, regardless of your previous experience.

By automating the critical aspects of trade credit, from onboarding to account management, you’re not just adding a new capability to your business—you’re setting the stage for growth, customer satisfaction, and competitive advantage.

Integration and Accessibility

Integrating trade credit management systems with other business systems, such as ERP (Enterprise Resource Planning) and CRM (Customer Relationship Management), can provide a holistic view of customer relationships and financial health. This integration ensures that the most comprehensive and up-to-date information informs decisions about extending credit.

Here’s the business case for adopting a
trade-credit customer onboarding solution: 

Business Case: Adopting a Trade-Credit Customer Onboarding Platform

Let’s get straight to the point: trade credit is much more than just a financial convenience – it’s a strategic powerhouse.

Offering trade credit will increase your revenues, for sure. Will it streamline cost management? Absolutely. Amplify your brand? Of course. And it significantly cuts down lending risks. Rolling out trade credit effectively means getting serious about who you’re extending it to, setting clear terms, and yes, embracing the kind of tech that makes managing it all a breeze. The right technology can simplify everything.

And if you’re wondering how to make trade credit work smarter for you, reach out to us at 1Centre. Let’s explore how our platform can open up an entire revenue line for you from all of your sales channels setting your business up for unparalleled efficiency and growth. Don’t miss this chance to make trade credit a cornerstone of your strategic planning.