An explanation of trade credit

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Dear Professor Bruce: I hear a lot about trade credit. What is it and why should I use it?Answer: Trade credit is an arrangement between two vendors to buy goods or services without making an immediate payment. For example, a construction business owner may arrange to buy materials from a local lumberyard and pay for it at the end of the month -- upon completion of the job in question.Trade terms are the conditions under which repayment is expected for purchases made through trade credit. Usually, a vendor has 30 days to repay a seller and if the vendor pays early, he gets a discount. For the same example, if the construction business owner paid within 10 days of the billing cycle, he could typically save 1-to-2 percent on his purchase.According to a new study, "Trends in Small Business Growth and Financing" conducted by Arduin, Laffer & Moore Econometrics, early pay discounts save small business owners $11.8 billion annually -- a figure that could grow if access to trade credit were to expand. On the flip side, the study found that payment penalties for small businesses that pay late aggregate to an estimated $2.9 billion annually, a figure that could decrease if extended payment terms were offered more often.Raymond Joabar, general manager at American Express OPEN, notes that "trade credit is a very popular form of financing -- about 60 percent of small business owners use it."However, as it is now, trade credit is not available on all purchases from all vendors and negotiating terms can be complicated, which may affect the smallest of small business owners more dramatically than larger businesses.One way to gain trade-like terms from vendors and eliminate the need to negotiate is the PlumCard, which offers small business owners trade-like terms on virtually all purchases.Products like this provide business owners with flexible trade-like terms, such as the option to defer payment for two months interest-free or receive early pay discounts for just about everything purchased with the Card.It is a good idea to review all trade credit and credit card terms carefully.For further information, please visit www.OPEN.com.(Bruce Freeman, owner of a small business and an adjunct business professor at Kean University, is always looking for interesting success stories and lessons learned. Entrepreneurs can e-mail their ideas to bfreeman(at)proline-com.com or visit www.smallbusinessprofessor.net.)