Technology is revolutionizing business payments and trade credit management. If you’re a large business looking for better ways to manage trade credit, you might be wondering: How does trade credit work today?
As companies strive to improve cash efficiency, they are embracing digital processing and automation, especially in the B2B space. Fintech innovation makes it possible to automate all aspects of the trade credit process. The end result is faster credit decisioning, underwriting, and approval to offer financing options to business buyers — in fact, according to Business Process Incubator, a CapGemini study found that 63% of organizations have improved customer satisfaction by using intelligent automation.
Let’s take a deep dive into how enterprise merchants can extend trade credit to drive internal efficiencies and scale their business.
What is Trade Credit?
Trade credit is an arrangement that allows buyers to pay for goods at a later date. Allowing business buyers to pay on credit is an effective way to attract and retain clients, but it exposes your business to the risk of not getting paid on time. This is where trade credit financing comes in.
Efficient B2B trade credit solutions allow suppliers to continue offering net terms while getting paid faster. Good trade credit solutions provide innovative options beyond invoice financing and factoring to solve cash flow issues. The advantages aren’t limited to a stronger cash position – Buy Now, Pay Later platforms like Apruve, designed for B2B sales, allow large enterprises to digitize trade credit offerings and manage receivables more effectively and efficiently.
Primary Pain Points for Companies planning to Extend Net Terms
Extending net terms to B2B clients has many advantages, but companies run into difficulties in two areas – trade credit administration and accounts receivable management.
Trade Credit
Challenges include:
- Manual and lengthy application process
- Lack of data or credit management experience that exposes the company to higher default risk
- Difficulty extending terms, handling paperwork, and monitoring accounts
A/R
Challenges include:
- Manual generation of customer invoices
- Regular monitoring of accounts receivables to ensure timely remittance
- Reconciling funds to the appropriate account
Before Offering Trade Credit, Consider this
Before you decide to extend trade credit, assess whether your company has the ability to underwrite buyer credit. Start by considering these questions:
- How does trade credit work at your company? Is it cost-effective to finance trade credit in-house or not? Should you segment your customers?
- Do you have a reliable process to evaluate the creditworthiness of clients? How much risk is your company willing to take for uncollected and unpaid invoices? Can you afford the risk?
- Do you have the ability to collect unpaid accounts? What would be the process?
- Is your staff doing strategic work or routine work?
- Do existing trade credit policies make it possible to scale your business to other products or markets?
Finding the Right Type of Trade Credit
Using trade credit creates opportunities to scale and grow. Trade credit provides a competitive advantage and allows you to increase sales and cultivate a deeper relationship with customers. However, mitigating credit risk is crucial – and it all starts with knowing what types of trade credit are available and evaluating which one best fits your business. Here are a few common trade credit examples:
Open Account Trade Credit
Open account trade credit is an informal arrangement to deliver goods and services before receiving payment. Trade credit policies vary from company to company, but open account trade credit is more common in smaller businesses.
Key features:
- Informal agreement between buyer and seller
- Seller sends the goods along with an invoice containing reasonable payment terms
Promissory Notes Trade Credit
Promissory notes trade credit is a formal arrangement where buyers sign a document that outlines the terms for extending trade credit. Sellers have a stronger case against buyers who cannot pay on time if they hold a promissory note. Companies often use promissory notes trade credit when buyers under an open account trade credit arrangement ask to extend net terms.
Key features:
- Buyer signs a promissory note for the amount owed
- Provides a fixed date for loan repayment and interest
- Allows sellers to seek immediate legal action when buyers do not pay on time
Bill Payable Trade Credit
With bill payable trade credit, the seller and buyer transact with a middleman, which is the buyer’s bank. The seller sends the commercial draft specifying the amount due as well as the due date to the buyer’s bank. The buyer needs to accept the draft through the bank before the bank gives the seller a go signal that the goods can be delivered to the buyer.
After acceptance, the seller can retain the bill and wait for the due date to collect money from the bank. Some sellers demand that the bank accept responsibility for paying the invoice. If the bank agrees, the bank can issue an instrument called the banker’s acceptance that proves their guarantee.
Key features:
- Seller writes a commercial draft requesting that the customer pay by a specified date
- Seller receives buyer and bank acceptance of a commercial draft before delivery of the goods
- Banker’s acceptance of the commercial draft is a liquid instrument that the seller can sell at a discount for instant cash flow
Of these three types of trade credit, bill payable trade credit provides advantages to B2B companies since a third party takes over the default risk.
How does Trade Credit Work using Modern Solutions?
Apruve is an automated trade credit and A/R solution that connects suppliers and buyers to a network of lenders. With Apruve, sellers can access trade credit financing to extend net credit terms to buyers. The Buy Now, Pay Later program allows buyers to pay on credit upon checkout since credit approval only takes a few minutes. Apruve automates high volume, routine invoicing for B2B enterprises by combining trade credit automation with guaranteed next-day financing on all open invoices.
Meanwhile, sellers receive funds for the sum total of all invoices generated through Apruve every night.
The main benefits of using Apruve are:
- Decrease DSO (Days Sales Outstanding) to 1 day
- Reduce headcount need
- Speed up payment processing
- Decrease reliance on credit cards (and thus, lower fees)
- Eliminate paper checks
- Minimize collection and underwriting costs
Removing manual processes and automating the broader accounts receivables function using tools like Billtrust also allows your business to realize cash faster. Consider further reducing risks for your accounts receivables by looking into the benefits of trade credit insurance.
Choosing the Best Trade Credit Solution for your Business
Growing businesses are looking for ways to streamline processes at scale, particularly with their routine and frequent buyers. Traditional trade credit methods may not provide as much of a competitive advantage moving forward.
Avoid the dilemma of increasing sales but taking a hit to cash flow when offering net terms. With Apruve, your business can shift accounts receivable default risk to a third party, extend credit terms, increase customer loyalty, and offer a better checkout experience without worrying about cash. Contact Apruve today to improve operational efficiency in trade credit and A/R.
