Generally, buyers are granted a time of 30, 60, or 90 days to repay the borrowed amount in the form of an invoice by businesses engaged in trade credit. For some trades, credit repayment time may extend to up to 180 days or longer. In this way, the buyer can avail, manufacture and sell products before even have paid for them. This leads to the revenue generated from the sold products which further can be used to pay against the sanctioned credit limit.
For example: If a buyer has agreed credit trade limit payment to be made in 40 days to suppliers and a trade credit term of 30 days with customers, the net benefit will be 10 days.
Trade credit is a form of 0% financing in which no or little interest rate is charged by businesses or paid by buyers against the goods and services purchased. This means there is no repayment charge for this financial instrument. It is a type of agreement for a certain number of days for sanctioned credit limit by the company allowing credit trade and is agreed upon by both the businesses involved in the trading.
For start-ups, getting trade credit could be a difficult task, as companies offering trade credit choose established companies with sound financial backgrounds. However, start-ups or MSMEs which are recently established can approach various suppliers offering trade credit facilities.
Also Read: How to apply for an MSME collateral loan announced by the government of India
Trade Credit Formula
Amount to pay = Total Amount x (1-discount)
Cash Discount Policy
Trade Credit is signified by three numbers, wherein the first two indicate discount percentage and discount period and the last number denotes the final due date. For Example 3/10 Net 30.
What does 3/10 Net 30 mean?
3/10 Net 30 is the trade credit offered and if 3/10 is displayed, it means that there is 3% of discount is offered to the borrower if the balance is paid within 10 days from the date of receipt. Or else the borrower amount is due in full within 30 days from the date of issuance.
For Example: If an individual purchases Rs. 10 lakh from Company A on the terms 3/10 net 30 and pays within 10 days, the borrower only needs to pay (Rs. 1000000 – Rs. 30000 = Rs. 970000). On the other hand, if the customer pays after 10 days, he must pay the full amount of Rs. 10 lakh.
Banks offering Trade Credit
Recent Rules from RBI
Dependable, trustworthy, and reliable suppliers are the key factors to building and expanding a business, as getting a trade limit from them can be beneficial in various aspects. Paying the borrower amount within 10 days (approx.) not only reduces the burden of the buyer but also makes him/her eligible to avail discount over the total amount.
If not able to repay in 10 days, still the buyer is in double profit, as he/she is getting trade limit at 0% interest rate and secondly, the buyer is making money by selling goods and services which are manufactured or produced from the money gained from Trade Credit limit.
