1. Businesses need to buy goods or services to sell them to their end customers at a profit and to keep their operations running smoothly. There are two ways that a business can purchase goods or services – by cash or credit.
2. For cash purchases, payments are made to the supplier or seller at the same time that the goods or services are received by the business. For example, when you go to the stationery store to buy a printer, the store will require you to pay for the printer before you can leave the store with the printer.
3. On the contrary, goods or services bought by credit is when the company and its vendor agree that the payment for the goods and services will come within a pre-agreed period, that is called credit term. This credit term can typically range from a few days to a few months, depending on the assessment of the credit profile of the customers, among others.
4. Purchasing goods and services via trade credit allows businesses to buy without having to pay upfront and right away. It helps with the businesses cash flow and the need to have huge amount of capital, which most new businesses may not have in its early stage of operations. That’s why businesses, particularly small businesses, often favour suppliers that offer trade credit.
5. While businesses benefit from the credit term provided by suppliers, it is important to be aware of the risks of owing too much. That’s why a thorough understanding of how to make the most out of trade credit is important for businesses who want to use trade credit effectively.
6. The amount owed to suppliers are recorded as Trade Payables in accounts of a business. It sits under Current Liabilities in the Balance Sheet Statements. As with other types of liabilities, businesses need to stay vigilant and regularly monitor the outstanding balances owed to suppliers. For example, if the agreed credit term, typically within 30 to 90 days is breached, businesses need to investigate the reason for the payment delay. Sometimes if a business fails to pay on time, the suppliers may begin sending reminders, charge late interest payments and potentially escalating measures to recover the debt, such as small claims court. This might result in bad reputation for the business and risk having its credit term being denied or reduced.
7. If you need help to understand further on how to maximise the advantages of using credit terms for your business, please come and talk to us. Our team of chartered and certified accountants at PL Biz Consulting Pte Ltd are on hand to support your business and answer your queries – reach out to us today.
