April 12, 2022Late Payments
If your business is a small- to mid-size Australian supplier, you likely have specific questions about trade credit risk. It is common practice in business-to-business relationships to provide trade credit, but this mode of operation may put the supplier at a disadvantage.
Will the buyer honour the B2B relationship and pay on time, or will they simply hop to another supplier and ask for more credit?
Trade credit relationships may come with a certain amount of inherent risk, but there are ways to minimize and mitigate it.
Is Trade Credit Inherently Risky?
Small- to mid-sized businesses in Australia, such as coffee roasters, health product manufacturers, and food and beverage industry suppliers, provide up to $1.3 trillion in trade credit to other businesses.
For the supplier, trade credit is a big risk, particularly because many businesses do not have formal procedures in place for this practice.
However, offering trade credit is a great way to move forward with a new client who may not otherwise have the funds to purchase goods or parts for manufacturing.
3 Ways To Feel More Secure When Taking a Trade Credit Risk
The World Trade Organization estimates that up to 90% of trade throughout the world is bolstered by trade credit and related financial strategies.
You can minimize trade credit risks with the steps below.
1. Fully Understand Your Options
Trade credit risk is more detrimental to the seller than the buyer.
Take stock of your options and determine whether setting up a trade credit B2B situation is your best bet for getting what you — and your company — need.
Determine whether you need to offer trade credit, and how much you should realistically offer, to gain an important client.
If you are sure about the details behind your decision, you will feel more confident in your choice.
2. Work With Reputable Buyers
Though it is impossible to predict with absolute certainty which buyers will be a trade credit risk or have trouble making their payments on time, you can mitigate a large amount of risk by checking predictive credit scores before offering trade credit or another type of B2B arrangement that puts you at risk.
You can incentivize buyers by offering a discount for early repayment of the line of credit.
3. Use Software That Streamlines the Process
Many businesses do not bother setting standards or creating a routine procedure for their trade credit financing.
This can lead to mistakes within the accounting process as well as when following up with the other business.
Using software that can run a credit check and send payment reminders can assist in managing customers’ accounts.
Learn More About Trade Credit Risk
If you do your research on a buyer and decide they are a good fit for a credit relationship, you will be able to sell at a higher volume, build a strong relationship with your customer, minimize trade credit risk and improve your overall cash flow.
Preserve your relationship with your clients and use PencilPay to streamline the B2B trade credit process.
If you want to see how PencilPay can work for your business, simply book a demo and we will be in touch.