trade credit

(noun)

a form of debt offered from one business to another with which it transacts

Related Terms

Examples of trade credit in the following topics:

  • Trade Credit or Accounts Payable

    • Trade credit is the largest use of capital for a majority of B2B sellers; Accounts Payable is money owed by a firm to its suppliers.
    • For example, Wal-Mart, the largest retailer in the world, has used trade credit as a larger source of capital than bank borrowings.
    • Trade credit for Wal-Mart is eight times the amount of capital invested by shareholders.
    • For many borrowers in the developing world, trade credit serves as a valuable source of alternative data for personal and small business loans.
    • There are many forms of trade credit in common use; often industry-specific.

  • Cash flow forecasts

    • Prepare for adequate future financing and determine the type of financing you need (short term credit line, permanent working capital, or long-term debt).
    • Even if you have a retail business and a large percentage of your sales are cash, it is likely that you offer credit (charge accounts, charge cards, term payments, layaway, trade credit) to your customers.
    • Thus, you need to have a means of estimating when those credit sales will turn into cash-in-hand.

  • Obtaining Credit

    • The credit card company uses the credit report, provided by the credit bureau, to determine if the lender is likely to pay back the loan.
    • Types of credit include: bank credit, consumer credit, public credit, and investment credit.
    • Credit is also traded in financial markets.
    • The purest form is the credit default swap market, which is essentially a traded market in credit insurance.
    • The term "credit reputation" can either be used synonymous to credit history or to credit score.

  • Credit Ratings

    • Credit ratings are determined by credit ratings agencies.
    • Results focus foremost on economics, specifically sovereign default risk and/or payment default risk for exporters (a.k.a. trade credit risk).
    • A credit score is primarily based on credit report information, typically from one of the three major credit bureaus: Experian, TransUnion, and Equifax.
    • Income is not considered by the major credit bureaus when calculating a credit score.
    • The credit bureaus all have their own credit scores: Equifax's ScorePower, Experian's PLUS score, and TransUnion's credit score, and each also sells the VantageScore credit score.

  • Trends in Credit After 2008

    • The events of 2008 led to a credit crunch, also known as a credit squeeze or credit crisis.
    • A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates.
    • In such situations, the relationship between credit availability and interest rates has implicitly changed, such that either credit becomes less available at any given official interest rate, or there ceases to be a clear relationship between interest rates and credit availability (i.e., credit rationing occurs).
    • Financial institutions facing losses may then reduce the availability of credit, and increase the cost of accessing credit by raising interest rates.
    • In this case, accessing additional credit lines and "trading through" the crisis can allow the business to navigate its way through the problem and ensure its continued solvency and viability.

  • Balance of Trade

    • A positive balance is known as a "trade surplus," if it consists of exporting more than is imported; a negative balance is referred to as a "trade deficit" or, informally, a "trade gap."
    • The balance of trade is sometimes divided into a goods and a services balance.
    • This cannot be true, because all transactions involve an equal credit or debit in the account of each nation.
    • Factors that can affect the balance of trade include:
    • In addition, the trade balance is likely to differ across the business cycle.

  • Factoring Accounts Receivable

    • On the other hand, the factor assumes the entire credit risk under non-recourse factoring (i.e., the full amount of invoice is paid to the client in the event of the debt becoming bad).
    • Other variations include partial non-recourse, where the factor's assumption of credit risk is limited by time, and partial recourse, where the factor and its client (the seller of the accounts) share credit risk.
    • Counter party credit risk: risk covered debtors can be re-insured, which limit the risks of a factor.
    • Trade receivables are a fairly low risk asset due to their short duration.
    • External fraud by clients: fake invoicing, mis-directed payments, pre-invoicing, unassigned credit notes, etc.

  • A short history of accounting and double entry bookkeeping

    • Legend has it that wealthy individuals, wanting to keep track of their possessions (cattle, stores of grain, gold ornaments and so forth), hired scribes to keep records of additions and deletions to their lists of possessions as they bought, sold, or traded them.
    • It does this by first identifying values as either a Debit or a Credit value.
    • A Debit value will always be recorded on the debit side (left hand side) of a nominal ledger account and the credit value will be recorded on the credit side (right hand side) of a nominal ledger account.
    • A nominal ledger has both a Debit (left) side and a Credit (right) side.
    • If the values on the debit side are greater than the value of the credit side of the nominal ledger then that nominal ledger is said to have a debit balance.Each transaction must be recorded on the Debit side of one nominal ledger and that same transaction and value is also recorded on the Credit side of another nominal ledger hence the expression Double-Entry (entered in two locations) one debit and one credit (Wikipedia 2009d).

  • The National Credit Union Administration (NCUA)

    • The National Credit Union Administration (NCUA) is the United States independent federal agency that supervises and charters federal credit unions.
    • The chartering of credit unions in all states is due to the signing of the Federal Credit Union Act by President Franklin D.
    • The federal law sought to make credit available and promote thrift through a national system of nonprofit, cooperative credit unions.
    • At first, the newly created Bureau of Federal Credit Unions was housed at the Farm Credit Administration.
    • As the insurer and regulator of federally chartered credit unions, the NCUA oversees credit union safety and soundness, much like the FDIC.

  • Credit Unions

    • Credit unions are substitutes and competitors of banks, owned by members as a financial cooperative.
    • Credit unions usually offer better rates on deposits and lower costs for loans
    • Credit unions offer access to borrowing options not always available at traditional banks
    • Credit unions increase competition (big banks tend to be oligopolies, while credit unions are intrinsically smaller in scale, thus high in quantity)
    • Credit unions are smaller, and therefore more likely to go out of business