Trade credit

The supplier credit, also called trade or trade credit, a short-term loan that a supplier ( vendor) is its customers (debtors ) gives, by granting a currency period and / or a payment term of 30 to 90 days for the payment of his delivery. This credit is common only among merchants and is a form of financing goods handling dar. For pre-term payment within a discount period is granted as a discount, a discount. As a backup of supplier credit usually the retention of title is chosen by the creditors.

Importance

The supplier credit, together with the short-and long -term bank financing, the second most important form of financing for SMEs. Main source of financing is the equity in the rule.

The distinction between bank and supplier credit is of particular importance, as is required for crediting own merchandise without authorization as a credit institution or financial services institution within the meaning of the Banking Act.

Interest rate

The effective interest rate of a supplier credit is approximated, as follows:

Example:

• Discount rate = 3%
• Payment = 30 days
• Discount period = 10 days

The formula for the exact calculation of the annual interest rate is:

In the example, the following applies:

The effective interest rate of the supplier credit is very high. However, please note that this interest rate only on the discount reference span ( = payment - discount period ) applies. The interest rate for the entire loan period ( = payment ) is much lower because the suppliers credit during the discount period is free of charge. Substituting in the above formula instead of the discount reference span of 20 days the payment terms of 30 days, a, the effective interest rate is only 37.11 percent per year. Many suppliers provide their customers with value date periods of up to six months in which the credit is also free of charge. Assuming in this example, a value 60-day period, the entire loan period increases to 90 days ( = payment value of time ). Substituting this term in the above formula, the effective interest rate of the supplier credit is only 12.37% / year. If the customer exceeds the agreed payment term, it is in default of payment. If the supplier does not charge default interest or can enforce, the effective interest rate of the loan continues to drop.

Customers get from their suppliers in the payment terms often a payment term of 30 days for example, acknowledged their bills. Within this time-limit, there is a further period of 10 days, for example, within the customer with a deduction of a discount is possible. Blasts the customer this period, the supplier credit is usually very expensive. For reasons of economy, it is often sensible to include a bank overdraft and pay the bill at the end of the discount period.

Calculation

The interest on the mobilization of the credit period are usually calculated at target prices as a deduction from revenue, the discount rate is the discount rate.

Example:

• Procurement quantity = 500 pcs / order
• Target Price = 100 € / piece
• Discount rate = 3%

Interest = procurement quantity x price x reduction target set = 500 pcs / order x 100 € / pcs x 0.03 = 1500 € / order

Interest rates can also be calculated as a surcharge on sales to cash prizes:

Interest procurement quantity x = x cash price mark-up rate = 500 pcs / order x 97 € / pcs x 3.093 % = 1500 € / order

The following relationship exists between the tee and mark-up rate:

Premium Rate = ( discount rate x 100): (100 - discount rate) = (3 % x 100): ( 100-3 %) = 3.093 %

Discount rate = ( Premium Rate x 100): (100 Premium Rate ) = ( 3.093 % x 100): (100 3.093 %) = 3%

Collateral

A supplier credit is usually secured by retention of title. That is, the supplier ( = creditor ) may demand the return of the goods, if no payment is made. However, the property can not back up the claim of the supplier completely. Even if the delivered goods are acquired through non-payment again, nor claims for damages, for example remain Impairment of the delivered goods. A supplier credit therefore usually requires a good credit worthiness and therefore also has the characteristics of a blank credit on. The emergence of a ( partial) unsecured debt can be avoided by additional collateral in particular guarantees that a bank or insurer ( " supplier credit guarantee ", " surety on supply of goods" ) are made or creditworthy third parties provide any other way the liability.

The supplier can protect themselves by recourse factoring where the factor not only ensures the refinancing of the supplier, but also takes over its credit risk.