What is supplier credit

Supplier credit is a financial arrangement that allows a buyer to defer payment for goods or services received from a supplier until after the delivery or completion of the agreed-upon transaction. This short-term financing option can provide flexibility for businesses in managing their cash flow and operational expenses.

Supplier credit involves a credit agreement between a buyer and a supplier, where the buyer is granted a credit limit for trading purposes. Unlike traditional payment terms where invoices must be settled by a specified due date, supplier credit allows the buyer to accumulate a balance within the agreed credit limit. This credit limit serves as a financial cushion, enabling the buyer to make purchases without immediate payment obligations.

Risks and implications for suppliers

While supplier credit can be advantageous for buyers, it poses certain risks and challenges for suppliers.

Suppliers must bear the financial burden of providing goods or services during the credit period, creating potential cash flow constraints. To mitigate this risk, suppliers may incorporate a surcharge into the invoice for the service. This surcharge helps compensate for the financial uncertainty and potential delays in payment, ensuring a fair arrangement for both parties.

Supplier debt and credit limits

Supplier credit is considered a form of supplier debt, reflecting the outstanding balance accrued by the buyer within the agreed credit limit.

Often, there is a predefined credit limit, such as $100,000, and once this limit is reached, the buyer is required to settle outstanding invoices to restore their credit balance. This dynamic encourages responsible financial management and prevents the accumulation of excessive debt.

Common scenarios for supplier credit

Supplier credit is commonly established through agreements between businesses and their regular suppliers. This arrangement is prevalent in industries where frequent and recurring purchases are made, such as cafes or retail stores.

For businesses that regularly order goods, accumulating 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 should establish clear communication and agreements with their suppliers. Regularly reviewing credit limits, monitoring outstanding balances, and adhering to agreed-upon payment terms are essential for maintaining a positive and sustainable relationship with suppliers. If additional credit is needed, buyers may be required to settle outstanding invoices that have not yet reached their due date.