What is supplier credit

Supplier credit is an arrangement that lets a buyer pay for goods or services after they’ve received them. This form of short-term financing can help businesses manage their operating costs and cash flow more flexibly.

Definition

Supplier credit is a credit agreement where a supplier allows a buyer to purchase goods up to a certain credit limit without immediate payment. This lets the buyer build up a balance within this limit, and providing a financial cushion that helps manage cash flow by delaying payment until later.

Risks and implications for suppliers

Supplier credit can benefit buyers, but it also comes with risks for suppliers.

During the credit period, suppliers pay for goods or services upfront, which can affect their cash flow. To handle this risk, they might add an extra charge to the invoice. This helps balance the agreement and covers any financial risks or payment delays.

Supplier debt and credit limits

Supplier credit is a type of debt where the buyer gather an outstanding balance up to a set credit limit.

If the credit limit is $100,000, the buyer must pay off their outstanding invoices once this limit is reached to reset their credit balance.

Common scenarios for supplier credit

Supplier credit is often set up through agreements between businesses and suppliers. This arrangement is common in places like cafes and retail stores where customers buy things often.

For businesses that often order goods, collect invoices and making consolidated payments once or twice a month is a common practice, streamlining the invoicing and payment process.

Managing supplier credit

To effectively manage supplier credit, businesses need to maintain clear agreements and open communication with their suppliers. Building and sustaining a strong relationship with suppliers involves regularly reviewing credit limits, monitoring any outstanding balances, and sticking to the agreed-upon payment terms. If additional credit is needed, buyers may be asked to clear any unpaid but not yet overdue invoices.