What is a supplier credit?
A supplier credit is a very short-term credit granted by a supplier to a customer. It is also often referred to as a trade credit. A specific payment period is granted for invoicing. The customer does not have to pay his invoice until this agreed date. It’s some kind of funding. However, the supplier reserves the right to retain ownership until the goods have been paid for. We all know the sentence “The goods remain our property until full payment”.
How does this supplier credit work?
In the case of a supplier credit, a specific payment term is agreed between the supplier and the customer; in most cases this is 14 days. In the best cases it can also be 30 days net. If the customer pays for the goods received before this payment deadline has been granted, he will be granted a so-called discount period! This is usually 3%. This means that the customer can take the cash discount before payment. It is then again a discount on the total invoice amount. On the invoice of the creditor (supplier) is, then the sentence “With payment of the invoice amount within the 10 days 3% discount” stands then. The customer may then deduct 3 % from the invoice amount. If a supplier is granted a payment term of 30 days, then the invoice amount is then “If payment is made within the 30 days payment in net cash.
Advantages and disadvantages of a supplier credit
The advantage is obvious. Small and medium-sized companies in particular benefit from this.
You do not have to pay in advance and you still have time to pay for the goods when the invoice is issued. En supplier credit is a procedure that is often used. It is solely an agreement between creditor and borrower, without a bank having to be taken on board. A supplier credit is usually available immediately. No complicated enquiries to the bank and waiting for approval are completely eliminated. This saves the borrower time and nerves. Any checks (creditworthiness of the customer) are omitted and the goods can be ordered and purchased immediately. It often takes 1-2 days until the supplier invoice arrives. The supplier credit can be granted both to customers in Germany and to customers abroad.
But the supplier credit also has disadvantages. It costs a high effective interest rate. This is not mentioned on bills. This means that if the borrower fully exhausts the term of payment, he waives the discount by granting a cash discount. If he fully exhausts the payment term, then the effectively demanded interest rate is very high. If payment is due within 30 days, the effective annual interest rate may then be around 30%. The customer so often remains in the belief that he would be granted an interest-free loan. But this is not the case, unfortunately it looks only at first sight.
But a supplier credit is the best and fastest way for the economy to arrange and obtain outside financing without banks. Supplier and customer credits are short-term trade credits that occupy a leading position in the financial newspaper industry. They are gladly taken up and given by a creditor gladly. It is easy to maintain and the goods always remain the property of the supplier until payment has been made.