What is Trade Credit?
Trade credit refers to an agreement between two companies, where the supplier of goods or services accepts a deferred payment from its client.
Trade credit management refers to the process of managing the credit extended to customers and the risk associated with that credit. This includes tasks such as credit application and analysis, credit limits, and collection.
Effective trade credit management helps a company to minimize the risk of bad debt and maximize its working capital. This includes monitoring customer payment patterns, setting credit limits, and implementing credit control procedures such as sending invoices and reminders. It also involves working closely with customers to resolve payment disputes or issues, and negotiating payment terms and conditions that are favorable to both the supplier and the customer.
What is Credit Management?
Credit management is defined as your company’s action plan to guard against late payments or defaults by your customers. An effective credit management plan uses a continuous, proactive process of identifying risks, evaluating their potential for loss and strategically guarding against the inherent risks of extending credit. Having a credit management plan helps protect your business’s cash flow, optimizes performance and reduces the possibility that a default will adversely impact your business.
Why is Credit Management & Control Important?
Late payment and payment default situations happen with alarming frequency – it’s critical to the financial health of your company to minimize them. Customers who fail to pay their invoices or drag their feet in paying can directly jeopardize the survival of your business, which is why having a credit management system is important.
Many businesses find it challenging to properly evaluate and track the creditworthiness of new customers. And when conducting business with foreign customers, customer risk management becomes even more complex because it can be difficult to interpret and rely on information used by foreign countries to measure creditworthiness.
Solving the challenge is a must: One in five business bankruptcies among small-to-medium enterprises occurs due to customers that default on their invoices. And though medium and large companies are better equipped to absorb a bad debt loss, non-payment events can still destroy their profit and spoil growth plans.
By employing effective credit management procedures, you can help your business bring in the revenue it’s entitled to and ensure long-term business continuity.
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