- A business line of credit is that which represents the maximum level of risk for a company.
- Trade credit consists of the value of goods sold to a customer on a deferred payment method.
- Generally, before granting a trade credit, the supplier analyzes several factors, including the company’s history and level of strength.
According to our experts, a commercial line of credit represents the highest credit risk a supplier can tolerate. When the supplier decides to assume this type of financial risk with one or more customers, it is because it has previously conducted an investigation of its customer or already has a history of cash sales, thus giving the customer the opportunity to access a corporate credit.
The reliability of the customer and the economic solvency of his company are some of the main elements that the supplier of products and/or services takes into account before opening a line of credit to the customer. Since the greatest risk is assumed by the supplier, in case of non-payment by the customer, in many cases it is cheaper to lose the debt than to go to court.
We must take into account that companies (especially startups) have a high probability of bankruptcy in the first year, so these are not the favorite companies to provide corporate loans.
In this article, we will deepen the topic of corporate credits, so that you as a customer have a better point of view when applying for a corporate supplier credit. On the other hand, if you are a supplier, we will provide you with important tips that you should take into account to avoid losing money and/or assets due to unpaid invoices.
Supplier credit: how customers are selected
During the customer selection process, a company’s commercial credit and credit score are vitally important aspects for the supplier, as these are some of the most relevant factors taken into account when approving or rejecting a supplier’s corporate credit application.
Although there are exceptions, the relationship of trust is not always the factor to take into account when opening a line of credit to a company, there must be impartial and objective analyses that allow the supplier to determine the risk of non-payment that it could have from its client.
Although each supplier determines the main elements for the opening of a corporate credit, below we will mention some of the most important aspects to take into account.
- Corporate and board of directors history.
- Company characteristics.
- Banking and commercial information.
- Business activities and potential.
- Internal statistics.
The credit limit granted to the client is generally determined by contract before starting the commercial relationship; in case of a modification, an adjustment is made, which is legally known as an addendum.
Generally, a corporate line of credit is valid for 12 months, our experts advise suppliers not to initiate shipment of products and/or services (with the exception of test samples) until there is a properly established and formatted contract by both parties involved.
Supplier credit: How is it determined?
It is important to mention that trade credit and the rules for its approval will depend on each supplier. However, there are basic elements that are taken into account when determining a trade credit from the supplier to the customer.
Some of the most important factors in determining trade credit are as follows.
- The duration of the commercial relationship.
- The importance of the customer to the company.
- The legal nature of the customer.
- Relationships with credit institutions.
- The reliability of the company’s representatives.
- The financial situation.
- Commercial structure.
- Quantitative score.
As mentioned at the beginning of this article, there is no single procedure to be followed by the supplier to evaluate and approve a trade credit. In fact, it is very common for companies to create their own procedure for evaluating a corporate credit application.
According to our credit experts, most companies prefer to approve trade credit applications with customers who meet the following factors.
Company size: According to our experts, suppliers prefer to approve commercial loans to large companies, since they are generally companies that have more financial resources than small companies. However, there are also suppliers specialized in small and medium-sized companies.
Years of activity: The age of a company is an important factor when determining the opening of a corporate credit. The longer a company has been in existence, the greater its capacity to demonstrate that it can face a financial crisis.
Number of suppliers: If a company has high debts with different suppliers, this can be a limiting factor when applying for a new corporate credit, as it could represent a high risk (more than normal) for the supplier.
Costs owed to other suppliers: The higher the cost owed to other suppliers, it could happen that depending on your punctuality of payment, the new supplier will give you a higher or lower credit. For example, if you owe a lot of money to a supplier and pay late, this can damage your company’s image and can be a determining factor for your credit line to be low or not approved at all by a new supplier.
Corporate liquidity: The higher your corporate liquidity, the higher your ability to meet debts, so your credit line could be higher.
Corporate Scoring: This is a measure used to determine a company’s credit history, as well as its economic solvency to meet its financial commitments.
Supplier Credit: Application and Grant Management
To proceed with an application for a business credit line, each customer must proceed with the application according to each supplier’s procedure. The supplier proceeds to create a file containing all the customer’s information, as well as updates during the business relationship.
It is the policy of large suppliers that the credit line is approved by the commercial and administrative bodies. In some cases, there may also be CEO involvement for the approval of a corporate line of credit. This allows for a higher level of control as the financial risk on the part of the supplier increases.
- Credit level I: This is a basic and limited credit level, which must be approved by the credit manager and area manager.
- Credit level II: Corresponds to a higher credit level, which requires the approval of the administrative and commercial manager.
- Credit level III: Corresponds to the highest credit level assigned to a client, usually requires the signature of the company’s management or the general director.
It is important to mention that, in order to apply for a corporate credit, information related to commercial, economic, financial and patrimonial character must be analyzed. In this way, there is a greater probability of acquiring an adequate credit rating, which is attractive to suppliers.
In addition, among the documents requested for the evaluation, commercial documentation is used, which can be acquired through companies specialized in providing commercial information services.
Supplier Credit – Frequently Asked Questions
Trade credit is considered the highest level of credit risk accepted by a supplier, which decides to take the risk of uncollectible invoices to customers with whom it has established a credit relationship by providing deferred payment.
In most countries, corporate credit consists of a credit for the provision of goods with deferred payment by the customer.
Each supplier has its own policies when determining whether to approve or reject trade credit. However, a rule that is always followed by the supplier is the credit and financial analysis of the company to determine the risk of unpayable accounts in the future.