What is Supplier Credit? Definition of Supplier Credit, Supplier Credit Meaning and Concept
The credit provider is a form of financing non - banking enterprises. It consists of acquiring the raw material necessary for the production process assuming a commitment to pay in the future without interest charges.
In other words, the company negotiates with its supplier (s) to stock up on inputs without having to pay them in cash. Thus, there is an outstanding debt that must usually be paid in 30, 60 or 90 days and where no financial expenses are generated.
Advantages and disadvantages of supplier credit
Among the advantages of supplier credit, the following stand out:
- It allows the development of productive activity without the need to lose liquidity, maintaining greater resources in cash and its equivalents.
- Capital is released that can be used for other expenses or emergencies in the short term. This is important taking into account that, in general, a part of the sales of the companies is on credit. That is, even if the company has made transactions of a large volume, the cash inflows may not be as high.
- It is requested according to the needs of the company. The time to pay vendors can then be matched with the date of collection for sales.
- Usually does not require guarantees.
- There is no interest payment.
- Increase the volume of sales, both for the supplier and the financed organization.
However, there are also some disadvantages:
- If the company makes use of credit, it loses the opportunity to obtain a discount for prompt payment. Sometimes, the borrower can access a reduction of his debt if he cancels it in a very short term.
- As in any form of financing, there is a credit risk, which in this case is assumed by the provider.
- The supplier can inflate the price of its product to recoup the cost of the loan, so financing could be expensive even if there is no interest.
- The destination of the credit is limited to the acquisition of inputs with a specific supplier.
Stages of supplier credit
The stages of supplier credit are as follows:
- Analysis of potential debtors: It is the process to determine the solvency of the client. Variables such as the company's equity, its financial ratios and credit history are taken into account. For the latter, the credit bureaus are consulted.
- Establishment of conditions of credit : If the transaction is approved, the main characteristics of the financing are set as the deadline for payment and surcharges for late payment. The provider usually also offers a discount for prompt payment. Thus, the borrower has the option of canceling his obligation before the agreed period, agreeing to a reduction of his debt.
- Credit instrumentation: The financing is materialized with some type of contract, such as a promissory note, bill of exchange or documentary credit.
- Delivery of the merchandise: The company obtains the inputs for the production process.
- Payment of the credit: After the agreed time, the provider should receive the respective compensation, although there is always the probability of non-payment.
Supplier credit example
A company makes a purchase from its supplier for US $ 15,000. They agree that payment must be made in 60 days. If the debt is paid off in 30 days or less, the lender offers a 5% discount. Also, in case of delay, a commission of 0.8% per day will be applied.
If the debtor takes advantage of the discount, he will pay US $ 14,250. On the contrary, if it takes 10 days more than agreed, for example, you will have to pay US $ 16,200.