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You might not understand why a business offers trade credit. After all, doesn’t it seem like a bad business move to give someone a product or service before they pay you the money? Well, it’s not as crazy as you’d think. In fact, for some businesses, offering trade credit is just what keeps their business alive.

Here are 7 reasons why companies extend trade credit (and maybe why your business should be doing so too):

1. It’s Industry Standard

Frankly, in some industries, trade credit is standard. In order to survive, businesses have to do as their peers do. Here are a few industries where trade credit is the norm:

  • Staffing
  • Construction
  • Manufacturing
  • Wholesale trade
  • Distribution and textile/apparel

2. Business Growth

Sometimes, if you’re a business wanting to secure a contract with a bigger business, you will have to accept payment on their terms. Larger businesses tend to have their own payment terms they require. Unfortunately, they are large enough to know if you won’t say yes to those terms, someone else will. That being the case, many businesses have to offer trade credit just to secure a new job. Growth of the business is worth the risk and larger companies tend to be less risky.

3. Beat Out the Competition

On the other side of that, some businesses offer trade credit to  remain competitive. Simply put, if a customer has to choose between a business who offers flexible payment terms and a business who doesn’t, given the service and price is comparable, they will always choose the one extending credit. Therefore, some businesses extend credit to get a leg up on their competitors who are not.

4. Increase Sales

Not only can trade credit help you win a customer but it can also help increase the volume of your sales. If a customer has more time to pay, it naturally increases their buying power. With more time, they purchase more, which means larger sales for you.

5. Financial Stability 

Extending credit is not a choice for businesses in tough financial times. Having a healthy cash flow is a must for businesses who want to extend trade credit. Therefore, if you are offering terms, you are telling people you’re business is in a good position financially. A strong financial reputation comes in handy when applying for loans or even when looking for suppliers to buy from.

6. Pride

 If you are willing to provide a product or service prior to accepting payment, you are telling your customers and potential customers that you believe in the quality of what you are selling. You trust your product will make your customers happy. This sends a clear message to buyers and helps build product integrity.

7. Say Thank You

If you are extending payment terms to customers, you are saying you trust them. Offering trade credit can be a great way to show appreciation to long-term, loyal customers. If you aren’t extending credit to all of your customers, you should consider doing so with your loyal customers. It’s an excellent way to say thank you for their business. The question really shouldn’t be why companies extend credit but rather whether or not trade credit is right for you. If you already offer trade credit, what benefits do you see from employing it? If you are not, do you believe it would be a good fit for your business? As you can see, trade credit is a great business opportunity for certain businesses. It’s time to evaluate what it means (or could mean) to offer it.

About the Author(s)

Meredith Wood

Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer.

Editor-in-Chief, Fundera
Extended Trade Credit