Trade finance is common in the business world. In order to remain competitive, most businesses understand the importance of letting customers make purchases with credit. But this means that managing trade credit is a big part of the job, which is both good and bad for businesses.
Perhaps the biggest advantage of accepting credit purchases is that it helps increase sales numbers. When purchasing products from a supplier, most customers need a large amount. Using credit gives them up to 30 days to pay off the full amount they owe for the products.
Customer loyalty is another big advantage of trade finance. Just the fact that your business extends credit to customers shows that it is trustworthy. This level of trust will spur customers to keep purchasing the products they need from your business, rather than from your competitors. The trade off for you is that the customers will feel a sense of loyalty and will ensure the products are paid for in full by the time the payment is due. This sense of loyalty and promise of quality merchandise will help you beat the competition every time.
However, another reason trade finance is good for business is that you can entice your customers to pay their balance before it is due. This can be as easy as promising customers that if they pay the balance back in less than 30 days they’ll receive a discount on their purchases. Many customers will do this to avoid having to pay interest on their purchases.
But for as beneficial as trade finance can be, there are also some downsides to it. One of them is that it temporarily leaves your business with a negative cash flow. Another is that for this to work, your customers must be credit worthy. You may choose to do the legwork to find out yourself, or you may prefer to hire someone who has experience with credit analysis.
In the event that a customer is extended credit and doesn’t pay it back, you have to reach out to them to make the payments or simply take the financial loss.
For more advice on the pros and cons of trade finance, please contact Bold Growth.