Credit terms or trade credit is the set of terms a company extends to its customers to allow them to buy goods and services on account without immediate cash payment, thereby creating accounts receivable for the company and accounts payable for their cus¬tomer. Trade credit is the largest use and source of working capital for businesses. The average turnover for accounts receivable is approximately 44 days, meaning that it generally takes over a month and a half for a small or medium-sized company to collect the cash it is owed for by its customers.
While trade credit can help a business sell more, it can also cause serious cash flow problems. The length of payment terms is a battle for working capital. Basically, the extension of trade credit is a free loan for the customer and the chance of collection decreases as the invoice ages. The customer (buyer) wants to extend this free loan for as long as possible so they can use the capital on their end. The business (sellers) wants the cash as soon as possible to manage their own expenses. The result is a work¬ing capital tug-of-war, which ultimately restricts growth.
So how can a business still offer trade credit and ensure it has cash to meet payroll and other expenses? Contact Factors Southwest (www.factors-southwest.com) to find out about our factoring lines of credit. Factors Southwest can put a stop to the working capital tug-of war!