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Trade credit accounts are accounts that are established by suppliers and vendors for the benefit of clients. These accounts make it possible for customers to secure goods and services that are required today and pay for them at some point in the future. There are several ways to structure trade credit accounts, with some equipped to allow full repayment within a certain number of days and others including either a revolving credit approach or some sort of business line of credit.
One of the more common approaches to trade credit accounts is a simple account that allows customers to received products now and pay for those products within a certain period of time. With this arrangement, vendors process and deliver an order, then prepare an invoice that is forwarded to the client. Typically, the client will pay that invoice in full within 30 to 60 days, keeping the account in good standing. Some vendors will offer discounts on the invoice totals for paying the balance due within a shorter period of time, or will delay applying interest on that balance if it is settled within at least 30 days.
A different approach to trade credit accounts involves the establishment of some sort of revolving account for the client. With this solution, the vendor will usually set a credit limit for the account and issue the client some sort of account or credit card number that can be used when placing orders. Each billing period, the client must make at least the minimum payment required in order to keep the account in good standing. The client is also free to tender payments covering the entire outstanding balance, or at least a larger portion of that balance than is covered by the minimum payment due. Accounts of this type will accrue interest from one billing period to the next, meaning that interest is charged on any balance that is not paid in full in the previous period.
Trade credit accounts may also be in the form of business lines of credit. This approach is somewhat like a revolving credit account, in that a specific maximum amount is set for the client, based on the evaluations of credit-worthiness by the financial institution issuing the credit line. Businesses may use this type of trade credit to secure funds that are used to settle operational expenses, then retire the balance before the end of the billing month as cash flow is received and used to settle the amount borrowed from the credit line earlier in the month. Trade credit accounts of this type generally do not accrue interest if that balance is paid in full each billing month, although a fixed or variable rate of interest may apply on an outstanding balance that rolls over into the next billing period.
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