Trade Creditors

Posted by SkillMaker in Dec, 2016

What are Trade Creditors in business?

Trade creditors in business include any entity (enterprise, government, organisation or person) that the business owes money, for goods and services provided by the entity. The money owed to trade creditors is recognised as a current liability in the balance sheet of the business because trade creditors have a claim over the assets of the business. The typical trade creditors of a business are suppliers.

Trade credit what trade creditors provide to a business. Trade credit is an agreement between the supplier and the business which allows a business to delay the payment of goods and services that have already been delivered. This funding provided by the suppliers of the business is called trade credit, while funding provided by financial institutions known as bank credit.

Why do businesses have Trade Creditors?

Trade creditors are a source of finance for a business because they provide goods and services for use by the business, but don’t require payment for those goods and services for some time later. Allowing payment to occur after the goods and services have been received, helps the business to better manage their short-term cash flows. Trade Creditors help promote business growth at a faster rate than if the business funded their growth by using savings from profits. Trade creditors also save both the business and supplier from having to deal with multiple transactions each month (invoices/payments) and usually collate all invoices during a credit term period and ask for a single payment as detailed on a summary statement.

What are the different types of Trade Creditors in business?

Creditors are categorised differently in accounting and finance. In relation to finance, there are three categories of Creditor: secured, unsecured and preferred. Accounting categorises creditors in terms of their ‘time to pay’: Current liability or Long Term Liability.

Secured creditors have secured a legal right or charge over the assets of the business in the event of a default. e.g. a bank with a mortgage over a specific property owned by the business
Unsecured creditors do not have a charge or security over any of the assets of the business. e.g. trade creditors.
Preferred creditor is given priority status under the Bankruptcy and Insolvency Act in the event of a business liquidation. i.e. they are paid out before any unsecured creditors are paid. Typical preferred creditors include employee entitlements like unpaid wages and commissions and remunerations.
Current liability creditors are those debts that are required to be repaid within the next 12 months e.g. credit card debt
Long term liability creditors are those debts with a repayment term that is longer than 12 months. e.g. a term loan from a bank

What are Trade Creditors like?

Trade Creditors are like friends who let you have access and use of something like a bike, but don’t ask for payment until sometime in the future. They didn’t gift the bike to you and expect you to pay for the bike at some agreed time in the future. In the period where you owe the money for the bike to your friend, they are like a creditor in a business. Trade credit is like a supplier giving the business a short term loan.

How do Trade Creditors operate with a business?

Trade creditors usually enter into a Trade Credit agreement with a business following the following steps:

Step 1: The business completes a supplier’s Trade Credit Application with the salesperson.
Step 2: The salesperson gives the Trade Credit Application to the supplier’s credit department who checks the Bank and Trade References provided by the business
Step 3: The supplier’s credit department also checks the credit rating of the business with the Credit Bureaus
Step 4: The supplier’s credit department together with the salesperson and the business owner, set a Credit Limit
Step 5: The supplier’s credit department establishes an account for the business and sets out the terms of the credit agreement including the credit period, payment due dates and penalties for late payment.

When do businesses typically set-up Trade Creditors and who is typically involved?

Some trade creditors can be set up prior to a business operating while other trade creditors require the business to demonstrate financial viability and a trading period before offering them trade credit. Trade credit is usually negotiated between the salesperson and the business owner, however, the salesperson’s credit department will normally be required to approve the credit application. The accountant of the business may also be required to provide financial reports to the supplier to prove financial viability.