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Business credit: Everything you need to know

August 11, 2021Contentshide1What is business credit1.1Types of business credit1.21. Short term business credit1.32. Medium term credit1.43. Cash Credit1.54. Trade Credit1.6Some of the trade Credit functions

This is a detailed explanation of a business credit in a lay man’s understanding and for financial students.

When you’re talking about credit and credit management, you can’t omit the business credit as it is very essential in the financial world.

Let’s proceed to the meaning of the term.

Business credit

Business credit is a credit that involves business men or individuals, companies and organisations, and it is the most widely used of all other credit.

Business credit is normally extended to various business organisations whether publicly owned or privately owned.

In finance, business credit is classified into different categories and they are as follows;

Types of business credit

  • Short term business credit
  • Long term business credit
  • Medium term business credit or cash credit
  • Trade credit

These are the the difference credits we have in the financial business credit. Now let’s take them one after the other.

1. Short term business credit

Short-term business credit is for short-term period ranging from overnight borrowing to 12 months.

It is extended to various business organisations by banking institutions and some non bank financial institutions. A typical example is the southwest credit card, capital one business credit card, and the business credit cards in general.

The main concern of those extending short-term credit is whether the borrower has the cash insight to repay the loan since the period is too short to permit repayment out of the borrower’s earnings.

To be on the safe side, those who extend short term credit always ensure that the recipient (borrower) satisfies one of the following three conditions.

  1. The borrower has enough income above his expenses to meet the repayment schedule.
  2. The project for which the loan is made is self self liquidating and will by itself provide the means of repayment
  3. The borrower is in a position to provide repayment funds by liquidating an excess current assets over current liability

2. Medium term credit

Medium term credit is for a period ranging from 12 month to up to 36 months or in some instances up to 5 years.

On the other hand, long-term credit to Borrowers for up to 10 years and more can be given depending on certain circumstances and types of business. Both medium and long-term credits have the following three features over the loan life.

  1. Interest as agreed is payable periodically
  2. The principal sum is repayable at maturity
  3. It may be repayable installmentally or in full at maturity

3. Cash Credit

In this aspect of business credit, banks and other financial intermediaries lend money to both business organisations, members of the public as well as to the government.

This is cash credit because money (cash) is lent to the borrower. Cash credit is therefore is concerned with borrowing money (cash) from the bank or other financial institutions on either short-term, middle term, or on a long-term basis.

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4. Trade Credit

In business credit, trade Credit is a means by which payment for goods sold and services rendered are postponed to a future date.

Types of business credit

The functions of deferred payment which money performs is clearly evidenced in Trade Credit because payment for goods and services is deferred to a future date.

Without allowing postponement of payment (Trade Credit), movement of goods through various stages of production and distribution would have been very difficult.

Trade Credit is described as the word prominent force of the modern business, and it is used as a business strategy in a competitive environment as well as a strategy for increasing sales and profitability

The volume of cash in any economy is always insufficient to settle every business transaction. Trade Credit in a business credit therefore perform every important functions for which it cannot be ignored in the modern-day business transactions.

In developing countries, credit transactions are more prominent than cash transactions. However, in a less developed country like Nigeria, cash transactions are prevalent. Nevertheless, Trade Credit is widely used by both government, general public and the business organisations.

Some of the trade Credit functions

  1. It is used as a strategy in a competitive environment to win and retain customers.
  2. It is a source of finance. Trade Credit is used to finance businesses by deferring payments to the goods bought and sold.
  3. Trade Credit is used as a strategy for increasing sales and profitability. When a business organisation allows generous credit, more customers may be attracted and this has an increasing effect on sales which leads to increased profit.
  4. It reduces the problem of carrying cash always for business transactions.
  5. For corporate organisations Trade Credit reduces their loan portfolio.

In a business credit, Trade Credit is essentially for goods and services that are for resale or for further economic activities that are geared towards profit-making.

Credit sales to final customers are not regarded as Trade Credit. This justifies the use of commercial or mercantile credit in place of Trade Credit.

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This is where I wrap it on business credit and the different types we have in finance. I’m sure to have explained all you need to know in a lay man’s understanding, and this will be helpful for every financial students.

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