One fine morning, you see an unexpected rush in your bakery. The gooey hot chocolate fudge ran out of stock within minutes. You ring up your supplier to get the ingredients for making the fudge. You sift the flour, sugar, and baking powder to create the chocolate magic for the evening batch!
Although you got what you needed from the wholesale supplier, you may not have the cash to pay them on the spot. What would you do? You can enter an agreement with the supplier and opt for a 30-day payment term. In this scenario, the wholesale supplier you purchased from becomes your trade creditor. It simply means you buy the goods from the supplier on credit and pay them back within a defined period.
Are you curious about how trade creditors work and impact your business? Read on to find answers to these questions and better manage your company's financials.
Are you running a construction company? Or do you own a retail clothing store? Where do you get your supplies, like those sacks of cement, tons of steel, or bulk fabrics? If you buy these things on credit, you owe money to the suppliers, right? Those are your trade creditors. They're basically like your business buddies who let you borrow stuff and pay them back later.
Also known as accounts payable, these trade creditors appear on your financial statements in two different places, depending on who you are. If you owe the money (your business), they appear as current liabilities, meaning you must pay them back soon! On the other hand, they appear as current assets on the creditor’s balance sheet as they receive the money.
But wait! Will these creditors readily allow you to buy stuff on credit? Not so. They check your financial statements and past payment history to see if you pay bills on time before giving you the option to buy things on credit. They also set a credit limit based on their findings (the maximum amount you can owe them). Imagine a detective doing a background check on the suspects and verifying their stories!
Navigating trade credit agreements can be complex. Platforms like Tratta simplify these processes, making it easier for you to manage your finances and maintain a good standing with creditors.
Are trade creditors the only type of creditors? In the following section, we will learn how other types of creditors differ from trade creditors.
Did you get an idea of the different creditors? Now, let’s clarify the often misunderstood term of accruals and how it differs from trade creditors.
Picture yourself running a construction business. You have various suppliers for steel, machinery, pipes, fixtures, etc. You receive invoices from the steel company and machinery rental service at the end of the month, but the plumbing invoice has yet to reach you. Does this mean that you don’t have to pay for plumbing services? No, right?
Let’s understand accruals using this example. Accruals are expenses you've incurred but haven't been invoiced for yet. Trade creditors, on the other hand, represent actual outstanding invoices you've received and need to pay.
After describing the landscape of different creditors, let’s focus on what it means for your business, focusing on the nitty-gritty rights and obligations of trade creditors.
Suppose you run a company that supplies building materials. A new construction company down the street places a big order of lumber for their latest project. You provide them with the materials on credit with a 30-day payment term. In this scenario, you, the building material supplier, are a trade creditor to the construction company.
A trade creditor has certain rights and responsibilities:
Fulfilling these responsibilities is crucial for developing trust with your customers. But what if the customer fails to make payments within the agreed period? In such cases, you can stop extending credit to that customer. Here are a few situations when trade creditors cease credit:
Let’s say a customer doesn’t pay you for your goods or services. What will happen? In such unfortunate situations, the type of creditor you are makes a difference:
Having brushed up on your rights and what happens in tricky situations, let's switch gears and see why these trade creditor relationships are gold dust for your business and how you can manage them like a pro.
As a business owner, you might owe money to trade creditors for their goods and services. If so, why is it essential to maintain positive relationships with them? And how can you better manage trade credit relations? Let’s find out!
When trade creditors keep close track of who owes them money and when the payments are due, it is called effective trade credit management. Here’s how it helps businesses of all sizes:
For instance, platforms like Tratta are specifically designed to streamline these processes, offering a seamless solution for tracking and managing trade credits with ease.
These tips can transform trade credit from a simple financial concept into a strategic tool for strengthening business operations and supplier relationships.
Now that you're all set on raising your trade credit game, let's step into the shoes of a trade creditor and see what keeps their boat afloat in monitoring and reporting.
So far, we’ve been understanding trade credit from the buyer’s perspective (your business). Now, let’s shift our focus and analyze things from the seller’s point of view (the trade creditor). Don’t they also need to manage the money owed to them (called trade payables)? Let’s see how they keep track of their records.
By monitoring and reporting on trade payables, trade creditors can safeguard their financial health and foster long-term, positive customer relationships.
We've reached the final stop on our journey through the world of trade credit! Throughout this blog, we've explored the concept from both the buyer's and seller's perspectives. Whether you're a business owner purchasing supplies on credit or a supplier extending payment terms to your customers, understanding trade credit is essential.
Trade creditors are the businesses you owe money to for goods or services. They can significantly impact your cash flow and supplier relationships. Buyers and sellers can unlock various benefits by effectively managing trade credit and building solid partnerships. Now, equipped with this knowledge, you can confidently navigate the world of trade credit. Schedule a call with Tratta today to manage your payments with ease!
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