by: Marco Terry

What is trade credit?
One of the major differences between consumer and commercial
transactions is that most, if not all, consumer transactions are
paid in cash or by credit card at the time of sale. Because of this,
most consumer businesses never have to worry about extending credit
to a customer and can run their operations on an "all cash" basis.
This allows them to focus on their core competencies because they
don't have to carry slow paying Accounts Receivables and go through
the expense of collecting on such accounts.

However, commercial transactions are different. Most clients ask
their suppliers to deliver services immediately and then to invoice
them for the work, payable 30 days later (also known as offering
net-30). In effect, clients ask their suppliers provide them with
"trade credit" for 30 days. Although suppliers don't like offering
trade credit, most have accepted it as an industry standard and have
learned how to operate and live with it. In fact, some suppliers
have even mastered how to offer trade credit and use it to better
position their companies with leading clients. Large creditworthy
customers, such as the government or large companies, will usually
demand trade credit as part of their contract negotiations. Some
examples of entities that ask for 30 to 60 day payment terms are:

o Fortune 500 companies
o Large and medium sized companies
o State government agencies
o Federal government agencies

On the positive side, providing trade credit to the proper clients
can be a tool that allows your company to win important contracts
and position it for growth. However, providing credit is also risky
and can erode the company's cash position if it is misused.
Furthermore, offering trade credit to less-than-creditworthy clients
can burden the company with bad debt and affect its growth
prospects. Because of this, business owners must walk a fine line
balancing their desires to grow their businesses with the
necessities of offering credit to their customers.

Keys to providing trade credit successfully
The best way to minimize the risk of providing trade credit to a
client is to perform a credit analysis on him. Although no credit
analysis is 100% perfect, they allow business owners to make an
informed decision on whom to issue credit to. Here are the three key
points to making a credit analysis.

o Have the customer fill out a credit application

Have all your customers that want credit fill out a simple credit
application. This will allow you to have all relevant facts in a
single document. The application should ask for the following
information:
1. Company structure
2. Banking relationships
3. Commercial references
4. Supplier references

o Check bank and supplier references

In their credit applications most clients will only list banking and
commercial relationships that will position them in a favorable
light - however - it is always a good idea to check on all of them
anyway. Banks will only be able to confirm that the client has an
account with them. Supplier references, however, may provide
critical information regarding the clients' payment habits.

o Check commercial credit reports

There are a number of companies that sell commercial credit reports
on businesses. As opposed to consumer credit reports that require
special permissions, commercial credit reports can be obtained for
any business without asking for prior permission. Reports vary in
their level of detail and accuracy and can be obtained for as little
as a few dollars. However, all reports will include important
information to help your credit department make a decision. More
detailed reports will cost a few hundred dollars. You can obtain
credit reports from the following companies:
a) Dun & Bradstreet (www.dnb.com)
b) Experian (www.experian.com)
c) Credit.net (www.credit.net)

Doing a credit analysis on your clients will allow you to determine
how much - if any - trade credit you can give them. Clients that do
not have a favorable credit analysis should be placed on a COD (Cash
On Delivery) basis, at least initially, to reduce the risk of
non-payments.

The challenges of offering trade credit
One of the main drawbacks of providing trade credit is that it can
create a cash flow problem for the company that offers it. Large
suppliers with adequate cash cushions in the bank can easily afford
to offer credit. However, small suppliers with lean bank accounts
usually find that offering credit will drain their cash resources
and create financial challenges. It is not uncommon for small
businesses to find themselves with a cash flow gap after offering
trade credit to their larger clients. This gap is created by the
fact that the company's Accounts Receivable account is strong while
the company's bank accounts and cash position are weak. The cash
flow gap places the business at risk of missing payroll and debt
payments. It also prevents it from pursuing new opportunities
because they don't have the funds to buy resources or hire the
necessary staff.

Bridging the "cash flow" gap

The biggest asset that most new businesses have, aside from their
equipment and intangibles (e.g. employees), is their unpaid invoices
or Accounts Receivable. Accounts Receivable is an asset that can be
quickly converted into cash by using a financial tool called
factoring. Factoring allows a business to sell the financial rights
to their Accounts Receivable to a third party, called a Factor. As
part of the sale, the factor immediately advances a large portion of
the cash value of the unpaid invoices to the business. The business
can then use this cash infusion to strengthen its cash position and
meet its obligations. In the meantime, the factor, which now owns
the invoices, waits to get paid by the customer. Factoring enables
business owners to outsource their trade credit function to the
factor and to turn their companies into the equivalent of an "all
cash" business. If you want to learn more about factoring and how it
can be used to grow your business, please read our white paper
titled "Factoring: Cash on Demand for your business without debt or
loans"

About the author:
About Commercial Capital, LLC and Marco Terry

Commercial Capital, LLC is a leading commercial finance company that
specializes in providing working capital through factoring to small
businesses. For more information or a free consultation, please
visit our web sites at http://www.ccapital.net or
http://factoring.qlfs.com or call us at (786) 206 4722.