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Commercial credit, an advantage for companies

Companies have configured a perfect mechanism to obtain financing without cost or indebtedness: commercial credit. Financing through suppliers is the main resource of most businesses. With this, they can acquire the products they need without losing cash immediately.

The problem is that the advantages of some –those who buy- are the risks of those who sell, and it is essential to find a stable balance.

At Circulantis, we know that the logical solution to balance the balance is to anticipate invoices. Thus, providers that grant credit can negotiate their collection right to obtain liquidity without having to tighten the conditions for their customers.

What is commercial credit?

Commercial credit is a very common formula and is based on making payment conditions more flexible in commercial operations.

According to data from CESGAR, in 2018, 37.6% of companies were financed with credit from suppliers, being the first option among all external financing formulas.

For those who buy, it is the ideal medium: they receive the goods or services and pay for them later. In this way, you protect your short-term financial position and can take advantage of supplies without losing cash flow.

Being such a common strategy, it ends up financing the entire supply chain in many sectors:

Companies grant payment deferrals to each other, generating a chain of credit in the transactions of the production and distribution cycle of each product, until it reaches the final consumer.

This generates two important repercussions:

First, it is a practice that goes beyond the negotiation between two companies. The natural competition between suppliers to sell can be transferred to a competition also in credit.

In fact, a customer can decide a purchase based on the facilities offered in the payment.

Second, a credit chain is threatened by any default. It is enough that a client does not pay his debt -invoice- to compromise all the previous ones and create mistrust in the entire sector.

Therefore, this model is only supported if the commercial credit has an assured liquidity line. In other words, companies that grant credit must be able to finance their rights in order to advance the pending money.

To achieve this, alternative financing models are a new solution for providers who need a fast and flexible environment. It is a transparent and safe way to negotiate commercial bills and anticipate the money of the invoices.

This new, more collaborative modality (crowdfactoring) is essential to strengthen the system, reduce delinquency, and ensure that SMEs and the self-employed are not as exposed to financial crises or bank credit restrictions.

How can you apply for a business loan?

Applying for business credit is similar to taking out a short-term loan to purchase supplies. In this case, it is based on the postponement of the payment of invoices.

To obtain a commercial loan, you must demonstrate solvency and offer guarantees. Although it is a common procedure, suppliers cannot grant credit to any customer, even less so if they do not know or perceive any risk.

The best guarantee for the applicant is to have a good solvency profile and not be included in any record of delinquency. In addition, you can strengthen your position by offering secure payment methods, such as promissory notes.

Suppliers value creditworthy customers. First, because they eliminate the risk of insolvency, and second, because this makes it easier and less expensive for them to obtain financing thanks to accepted promissory notes and invoices.

In short, commercial credit generates rights and obligations, represented in commercial documents.

In fact, this strategy supports a dynamic credit and financing sector based on the collection rights of the self-employed and companies.

If providers have liquidity alternatives, it is easier for them to accept deferrals. Now, with alternative financing, they can resort to:

promissory note discount

Discounting promissory notes is the best instrument to anticipate invoices as they are solid and well-accepted documents.

The promissory note collects the amount of the invoice and the client’s signature confirms their commitment to pay on the agreed date. A company can assign these titles to a financing company to advance the money at a discount (the cost of the operation).

factoring

Factoring is an invoice advance service that adds collection management and risk assessment. It can be requested for invoices, promissory notes, accepted letters, work certifications or other documented collection rights.

Forfaiting and export insurance

Forfaiting is a factoring modality designed for export operations. For sales outside the euro zone, it is advisable to add some credit insurance for international trade or to insure the value of foreign currency.

Finally, some clients, especially large companies, offer confirming to obtain commercial credit. In this formula, a bank manages and guarantees payments but at the cost of longer terms. To compensate, it offers suppliers advance payments of pending money under its conditions.

Requirements to request a commercial credit

Negotiating the requirements to apply for business credit is a delicate part of a business transaction.

Legally, there is a maximum period of 60 days to pay transactions between companies. However, the critical situation of some businesses or the bargaining power of large companies weaken the regulations.

Sellers must find balance points to be flexible without giving in too much, because this would end up putting their treasury and the fulfillment of their own obligations at risk.

Customers, as credit beneficiaries, must also offer payment solutions that provide confidence and facilitate the agreement.

It is essential that each one fulfills their part and that all the documentation that is generated is in order and signed. Not only the commercial itself: budgets, contracts, delivery notes, invoices… but any other guarantee that has been established.

Some of the requirements that companies impose to offer credit are:

Creditworthiness requirements: Some organizations have a risk department to assess clients and decide how much credit they can be granted. It is also common to order business reports to analyze credit history.

Work with promissory notes. This title binds the client with his signature, has legal value and is a solid guarantee of payment of an invoice.

Request guarantees: the signature of a third party committing to pay if the debtor does not do so is another requirement that can be considered.

Payments in advance: depending on the operation, the supplier can request a percentage in advance and be more flexible in subsequent payments.

Additional guarantees: it is about increasing security by requesting other documents such as credit insurance or a bank guarantee.

The most important thing is the coverage of delinquencies or defaults, which is why maximum importance is given to the mechanisms that ensure collection on the agreed date.

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