The Top 4 Advantages of Selling on Trade Credit
Trade credit is a valuable offering for your customers but does not come without risk. Discover how you can protect your business through trade credit insurance.
For many businesses, regardless of sector, success hinges on having the right materials and equipment on hand to provide the best services for customers. However, purchasing these essentials upfront requires a significant investment, which isn't feasible when cash flow is tight.
As a supplier, this is bad news; it means your customers are operating without crucial assets, and you are missing out on their custom.
Fortunately, there's a solution – trade credit. Offering trade credit allows your customers to secure the essential products and services they need from you without straining their finances.
In this blog, we'll explore the ins and outs of trade credit and how to protect your business from the potential risks involved in offering credit.
What is trade credit?
Trade credit is a type of short-term financing that allows your customers to purchase goods and services from you without needing substantial funding. This unsecured credit means it does not require collateral or a guarantee. Instead, the decision to provide trade credit is based on your lender’s assessment of the business' creditworthiness.
Trade credit can be useful for businesses across almost any sector. Any company that relies heavily on the timely delivery of goods and services to complete projects and generate revenue would benefit from trade credit.
Businesses that offer trade credit often outcompete businesses that don’t. More on this later.
How does trade credit work?
Trade credit is usually offered for a period agreed upon between you and the customer. This can vary depending on the nature of their business, but the most common repayment term is 30 days. During that time, your customer can access assets essential to the success of their operation while keeping their working capital intact.
While no one wants to consider worst-case scenarios, you may have a customer who cannot fulfil their financial obligations due to insolvency or cash flow issues. In the event of late repayments, any outstanding amounts may be subject to interest, incurring additional costs.
Overall, trade credit is a flexible and convenient way for your customers to finance their operations, reducing their need for costly, short-term financing options and helping them to grow and thrive in the long term.
What are the advantages of selling on trade credit?
Puts you ahead of competitors
Trade credit is an appealing offer that allows you to be more competitive in your market. Often, even if your products or services are more expensive, selling on credit when your competitors do not is a factor that might lead to being chosen over them.
On occasion, businesses value having the option to pay at a later date and may be willing to pay more as a result.
Encourages larger orders
If your customers know they can pay at a later date when purchasing your goods and services, they are far more likely to make larger orders, knowing that the purchase will be significantly more affordable in the long term.
This means that, rather than ordering a smaller amount, you often find that your customers will opt to buy more if the monthly costs are right for them.
Potential for increased sales
Similarly, trade credit can also lead to an increase in sales because customers will make purchases more frequently if they know their cash flow will not be disrupted when ordering with you.
Boost customer satisfaction and loyalty
Trade credit enables your customers to access the goods they need without financial stress that could impact their business.
By offering trade credit and providing this positive experience for your customers, you can improve satisfaction and build a loyal customer base.
If your service is quick, easy, convenient and affordable, why would they go anywhere else?
What are the potential risks of trade credit?
While selling on credit has many benefits, it also comes with risks. For example, if your customer cannot meet their obligations, that income may become effectively lost.
As a supplier, this can have a domino effect on your business, leading to cashflow problems, issues covering expenses and disruptions to your supply chain, resulting in production or delivery delays.
Ultimately, all it takes is for one customer to fail to make their repayments, and it can have an enormous impact on your business, affecting commitments made to all your other customers.
How to mitigate the risks of trade credit
We understand that the risks of trade credit are not to be taken lightly. However, there is a measure you can take that ensures you can stay protected while still offering credit.
Trade credit insurance is a policy designed to safeguard businesses from financial losses if their customers cannot pay for goods or services obtained through credit.
This insurance provides an added layer of security, freeing businesses from the fear of incurring losses due to customers' non-payment.
By opting for trade credit insurance, you can transfer the risk of non-payment to your insurance company. In the event that a customer cannot pay, the insurer will cover upto 95% of the invoice sum.
This removes the stress and threat of financial instability while still offering your customers the benefits of trade credit.
Protect your business with trade credit insurance from PIB
While trade credit can help expand your offering, making you a more appealing option to your customers, you must consider and mitigate against the risks wherever possible.
At PIB Insurance Brokers, we understand the risks that trade credit can expose a business to. That's why we work hard to connect our clients with the right trade credit insurance policies that meet their needs.
If you have any questions or would like to receive tailored advice, don't hesitate to contact our specialists today.