In an ideal world, sellers prefer upfront payments from buyers during a transaction. Buy Now Pay Later slowly transformed payments in trading. Businesses can now accept payment for the goods sold. The buyer on the other hand can split payments into easy installments. With the buy now pay later facility, businesses now can reach customers who normally wouldn't be able to afford to buy from them. Similarly, in B2B wholesale, retailers place orders of a large quantity and often the value of a single transaction would be expensive. But many retailers, especially those running a small business may experience cash shortages.
This gives wholesale sellers two ways to deal with this situation. Wholesale sellers can deny selling inventory to retailers. By doing so, they lose a potential customer and sacrifice a consistent revenue opportunity. The second and the most commonly accepted course of action is to accept the risk and enable retailers to pay later in smaller installments by extending credits.
Wholesale Trade credit is a short-term financing agreement in wholesale B2B selling where a wholesaler (supplier) allows a retail buyer (customer) to buy inventory and defer the payment within a previously agreed time frame. By doing so, the wholesale seller extends a line of credit to the buyer, freeing up their cash flow over a short duration.
The Federal Reserve Banks’ Small Business Credit Survey in 2022 noted that nearly 59% of small businesses operated in fair or poor financial condition. The survey also reveals that 85% of small businesses experiencing financial difficulties in 2021. Businesses that are either starting up may require financing to operate, scale up and turn profitable.
Traditional loans from banks and other institutions may involve intensive paperwork, long approvals and high interests that could impact retailers. That's why retailers and small business owners prefer to seek trade credits from wholesale suppliers while buying inventory from them.
Trade credit isn't about deferring payments. When you look closely, it becomes a strategic tool that could benefit both wholesalers and retailers in B2B selling.
Let's explore why wholesalers should offer trade credit, and how it impacts B2B wholesale.
As Wholesale buying involves large orders and higher transaction values, cash-strapped small businesses may be unable afford upfront payment. While they require inventory to sell, they also have to invest in business operations. By accepting trade credit, these retailers have the inventory in hand to sell. Retailers can allocate the money towards rent, marketing and focus on attracting customers to improve sales. Trade credit allows retailers to invest in sustaining their business growth, fulfilling market demand and generating revenue.
With trade credit, retailers aren't restricted by immediate cash on hand. They can choose to buy larger inventory from wholesale sellers confidently. This helps them unlock bulk discounts and other benefits that the wholesale seller offers. By acquiring inventory at marginal prices, retailers can offer competitive pricing which in turn translates into more sales at higher profit margins.
Offering trade credit can help retailers meet seasonal demand or sales forecasts. By doing so, retailers gain that flexibility to purchase inventory more frequently, per demand. Otherwise, retailers end up overstocking inventory only when they have cash in hand. This leads to in-frequent business with wholesale sellers, and high holding costs for retailers.
By offering credit, wholesalers expand their reach to accept orders from a wider pool of retailers, especially those with limited capital. This can help wholesale sellers generate recurring revenue, boost sales volume and win customers.
Extending credit during purchase helps wholesale sellers foster trust and builds long-term relationships with retailers. It improves the retailer's confidence in their ability sell inventory at higher margin and payback wholesale sellers. This helps wholesalers build valuable partnerships that results in repeat buying.
When implemented with enough security measures in place, trade credit terms minimize the risk of bad debt. Assessing the retailer's payment history, credits score and profiling retailers can help wholesale sellers to avoid missed or late payments.
With trade credit, wholesale sellers can be assured of repetitive buying. This creates a predictable sales flow, allowing wholesalers to forecast sales patterns and optimize their inventory levels. Wholesalers can make insightful demand forecast and prepare for sales without overstocking and increasing the holding costs. Wholesale sellers will also be able to cater to seasonal demand and prevent lost sales opportunities due to stock outs.
Trade credit in wholesale transaction is a short term zero-interest loan that wholesalers offer to retailers.
Here's the breakdown of how wholesalers offer trade credit to retailers:
The wholesaler assesses the creditworthiness of the retailer. Usually, this helps the wholesale seller to gauge if the retailer can honor the net terms and pay on time. The wholesaler scrutinizes the retailer's financial health, payment history, references, and any outstanding debts. If the retailer's financial health is satisfactory, the wholesaler agrees to offer a trade credit
Once the retailer is eligible to receive a trade credit, the wholesaler defines the net terms. These terms typically involve a "net" period within which the retailer must pay. Some wholesalers may offer retailers a discount if they make an early payment.
The retailer now can place an order and gets an invoice that details the order along with the detailed payment terms.
The retailer, after receiving the inventory from the wholesaler will try selling to their customers at higher profit margins. This gives them sufficient cash flow that helps them pay the invoice within the agreed net period.
Wholesale sellers may choose to offer a uniform net payment or custom net term based on the transaction. Some wholesale sellers choose to offer a smaller net term payment window while some can offer longer net periods. Let's look at the most common net term payments in B2B wholesale selling.
This is the most common net term in trade credit. In Net 30, the retailer has 30 days from the invoice date or the inventory delivery date to settle the full invoice amount.
In Net the retailer gets a longer grace period, with 60 days to settle the invoice.
This is less frequent than the above net payment terms, but preferred by some wholesalers. Net 90 offers retailers 90 days to settle the invoice payments. The Net 90 is offered typically to established businesses that purchases bulk shipments of higher value and has a reputable track record.
For wholesalers who require faster access to cash, Net 15 is a very convinient trade credit. The shorter payment term methods offers retailers 15 days to settle the invoice payment.
To promote early settlement, wholesalers sometimes may choose to offer discounts tied to the net payment terms. The discounts incentivizes retailers to prepone payments to avail benefits. These payments are set like in 4/20 n/60. In this case, retailers will get a discount of 4% if they paid back the due amount within 20 days from when the net period begins. Otherwise, the net amount is due within 60 days.
When wholesalers offer credit to buyers, there is always a risk of delayed payments, payment frauds and defaulting payment. This not only hurts revenue for the wholesale seller, but impacts how they do business with other retailers. As a result, retailers who are looking for flexible payment options may choose not to buy from the wholesale seller.
To reduce the risks associated with trade credits, wholesalers can enforce precautionary measures. Here's how:
Check if retailers who would like to buy from you have stable financial health. The financial health can be gauged by checking their credit score, observing past payment patterns and the business health. Through screening helps wholesalers determine if the retailer can settle the payment within the stipulated time.
Establish clear threshold limits of credit amount that retailers are eligible for based on the cart size and order volume.
Extending credits based on verbal agreements may hurt wholesalers and ruin business relationships. Sellers must have a signed agreement in place that outlines credit terms and conditions, including net terms, late fees, and dispute resolution procedures. Having a documentation prevents any miscommunication and can help wholesale sellers seek legal aid in case of non payment.
Keep tabs on invoices and payment timelines. Follow up on retailers as the net period is approaching to avoid overdue payments. Set automated alerts and reminders to remind retailers about approaching payment deadlines.
Adapt to business growth or stay resilient during financial strains by regularly adjusting credit limits. This avoids bad debts from trade credits hurting the wholesaler's profit margins. By adjusting trade credits based on financial fluctuations, wholesale sellers can maintain optimal cash flows while helping retailers.
Offering trade credits help wholesalers in generating sales and maintaining healthy relationship with buyers. As wholesale e-commerce goes digital, choosing a platform that supports flexible payments is important.
Wholesale e-commerce platforms offer several advantages that can significantly help wholesale sellers mitigate risks associated with trade credit:
Wholesale e-commerce platforms integrate with credit bureaus and scoring institutions. This not only digitizes the process, but also automates pre-screening. Wholesalers can use these metrics to determine if retailers are eligible for trade credits and reduce processing times.
Having a wholesale e-commerce platform that supports trade credits offer wholesalers a library of pre-built templates for agreements. This reduces the time to tailor net terms, but also helps maintain a record of terms and payment timelines. Retailers can also purchase inventory by simply e-signing to speed up shipping and delivery.
Wholesale e-commerce platforms offer sellers digital invoices and the ability to set alerts and reminders for timely follow ups. Through payment gateways, wholesale sellers can offer retailers convenient payment methods to accept local and international payments.
Wholesalers can rely on e-commerce platforms to understand the total loans and existing inventory in hand. Wholesalers can also check a retailer's outstanding balance and modify credit limits accordingly.
Online B2B selling platforms help wholesalers gate their online store. This means, retailers have to create a profile before they get to access the product catalog and buy. Having approved profiles help wholesalers avoid fraudulent buyers from placing orders on the store and offering trade credit.
By profiling retailers, wholesale sellers can set dynamic tired-based pricing structure based on the retailers purchasing and payment behavior. The frequency of purchase and compliance to past trade credits, help wholesalers set tired credit limits to avoid bad debts and loss.
By leveraging these functionalities, wholesale e-commerce platforms empower sellers to offer trade credit with greater confidence, reducing the risk of defaults and bad debts. This fosters a more secure and efficient trading environment for both wholesalers and retailers.
B2B wholesale selling is a lot more different from traditional DTC selling. The order volume is high, the cart value is significantly expensive and payment terms are different. But to foster healthy relationship with buyers and capture sales opportunities from international retailers, wholesalers offer flexible payment terms. Trade credit lets retailers defer payment at a later date at the time of purchase. With online sales platforms, wholesalers today can offer trade credits confidently and minimize the risks from bad debts.
Foundation is an online wholesale platform built for B2B selling and helps wholesalers sell to retailers around the globe confidently.
