Trade credit—a type of interest-free loan—is an important part of a successful B2B payments ecosystem. It’s important to both merchants and buyers, and offers benefits to both. As an “instant” form of credit (thanks to the delayed payment), it’s a popular option with buyers. Even better, many sellers incent early payment by offering a discount, such as a 2% off the total due.
For B2B merchants, offering trade credit is essential for attracting and retaining customers. Buyers love trade credit, because it’s also considered a “free” form of payment since there’s no interest.
But, for your buyers, it’s actually only free until the discount period expires—and this is when the customer who doesn’t take advantage of the discount incurs the cost of trade credit.
For example, a buyer can receive a 2% cash discount if the invoice is paid within 10 days; the net date is 30 days. By choosing not to pay within 10 days, they have 20 more days to use the 2% that they could have saved. If this amount is annualized, it actually costs 36% of the total cost of the products purchased.
Here’s the formula to calculate the cost of trade credit—i.e., not taking the discount—to a buyer.
Discount Percentage ÷ (1-Discount %) x [360/(Full allowed payment days – Discount days)]
What is Trade Credit Insurance? And, Do You Need It?
So that’s the B2B buyer’s experience with trade credit. On the other hand, B2B sellers may feel like these uncertain times make credit insurance a smart way to reduce risk. Sure, trade credit insurance can protect your business when extending terms; but what B2B businesses really need is a way to mitigate risk while they grow.
Just what is trade credit insurance? Trade credit insurance provides a safety net for organizations in volatile industries or those that derive a majority of their revenue from a small percentage of their portfolio. It is not a catch-all solution for mitigating risk, however.
US insurers have reduced their coverage by 10-15%, figures that could reach 25%, according to some analysts. Reduced coverage isn’t the only hurdle facing B2B businesses relying on trade credit to scale. Since the outbreak of Covid-19, trade credit insurance rates have increased an average of 10%.
With lenders nervous about overextending, it falls on sellers to perform their due diligence to understand and navigate their trade credit insurance contract. Trade credit insurance is complex and unforeseen loopholes could mean you’re not covered when you need it most. For example, trade credit insurance is usually not available for high-risk accounts and policy limits can restrict recovery. Plus, there are deductibles and minimum loss thresholds that minimize its usefulness.
What’s a company to do? Fortunately, trade credit insurance isn’t the only option for SMEs looking to mitigate risk while offering payment terms to buyers.
To bolster their B2B trade credit strategies, many businesses are finding success outsourcing A/R and credit management to B2B payments solutions such as TreviPay. We extend risk-free credit and automate A/R under your brand, while providing protections against bad debt. TreviPay handles the underwriting, credit lines, onboarding, collections, invoicing requirements and more.
We allow B2B businesses to grow their share of wallet from their biggest customers while protecting working capital and mitigating risk. By introducing a frictionless payment process and preferred payment options to your credit management strategy, buyers stay loyal and increase AOV. Watch an on-demand demo to see how TreviPay fits into your business plans.
Start a conversation with one of our B2B payments experts today.