It’s safe to assume that every business is a trade debtor and trade creditor at some point. In our previous article, we’ve discussed what a trade debtor is. To recap, it refers to businesses that are on the purchasing end of the deal. Trade debt is incurred when a company acquires products or services from another business but has not paid them off yet.
With that said, one can say that the Trade Creditor is on the providing end of the deal. It is a business or establishment that loans products and services to other companies that may need them for a specified period. Both the debtor and the creditor mutually benefit from this type of business relationship.
In accounting, trade credit is considered a current asset on the provider’s balance sheet. On the part of the purchaser, it becomes a current liability or account payable.
Should You Consider Being A Trade Creditor?
The answer to this question depends on the nature of your business. If you’re selling perishables like ready-to-eat meals, for example, putting up your products for credit may not give you much benefit in the long term. There’s a good chance it may backfire, and you end up losing money instead of profiting.
Then again, if you’re selling ingredients, becoming a trade creditor may not be such a terrible idea as your products are essential materials to the creation of another product despite being perishable. You can get in touch with restaurants, food processing factories, and other food-based businesses to propose a credit line. Since these businesses will make use of your goods to generate their profits, their success becomes your success as well.
Again, it’s a working relationship wherein both parties are benefiting from each other.
Other businesses that may want to consider offering their goods on credit are those manufacturing dry materials for assembly goods like machine parts, land and gravel, office wares, lumber, etc. Service providers can also benefit from this kind of setup, notably those that provide subscription plans or monthly services like phone and internet companies, VPN, accounting and law firms, digital marketing agencies, and the like.
Is Becoming A Trade Creditor Worth The Risk?
It depends on how you play your cards. Having long-term business partners that would purchase on credit from you can be an excellent thing for your business. It could mean having loyal purchasers who buy goods in bulk. Success in their trade would mean more business for you, so it’s a win-win relationship.
But because the performance of their business also affects you, the trade creditor, their loss can also mean your failure. When a company goes bankrupt, it would be difficult for you to demand payments for previously acquired goods. It is in this case that becoming a trade creditor becomes risky.
Still, if you’re hell-bent on becoming one, there are specific measures you can take to ensure that you’re on the winning end at all times, such as:
- Carefully screen your business partners. Always do a background check on a company’s performance and credit status before offering any deal.
- Offer a feasible payment schedule that will benefit both the creditor and debtor. Usually, a credit period of 10 to 90 days is preferable.
- Do not pile on credit more than the allowable limit.
Most of all, you have to stay on top of your accounts. To not lose any business, you have to be keen with your credit records. Your balance sheet must continuously be up-to-date. If this is not a task you can handle by yourself and you’re reluctant to hire people for the job permanently, you can always outsource such needs to reliable professionals.
To know more about what we can do to assist your business, feel free to get in touch any day. We can give you advice on how you can run things more smoothly – for free! Annette Ferguson – a Chartered Accountant and Certified Profit First Professional – can assist you in unlocking financial strategies to boost business profitability. You can also follow us on any of our social media channels and subscribe to our YouTube channel.