When The Going Gets Tough, The Tough Allow Trade Credit

Trade credit is a powerful tool as long as it’s used in a balanced and strategic way. Using it to keep customers and gain market share in this economy might prove to be your greatest achievement to date.


Trade credit, or buying goods or services on account without making immediate cash payment, is a two-way street for a small businesses. Often companies will accept accept trade credit from another company to defer payment for supplies or services, while doing the same for their customers on the other side. Issuing trade credit can help your business survive and prosper in tough economic climates, like we’re in now. Similar to our country’s debt, issuance of trade credit is not a black and white issue. The answer to whether you should use it is not “yes” or no,”; the answer is “balance.” Credit in itself is not bad. Credit is like red wine. One glass a night can be healthy. A bottle every night, not so much. Credit used wisely and in moderation can actually make you more money and grow your business faster, no matter the economic conditions are.

The magic of issuing trade credit to your customers lies in one word: flexibility. In our economic environment a business must be flexible to survive. Flexibility can come in the way of moving locations, automating to cut costs, or making manufacturing more efficient. With issuing trade credit comes flexibility in two areas: retaining customers and acquiring new customers. 

A prominent clothing manufacturer entered 2007 having just finished a year of record profits. His seven clothing brands had been selling steadily to retailers for years. In addition, he had found an ingenious income stream from reselling brands that were out of season in one part of the world to a part of the world that was just starting their season. All was right in the world until the recession reared its ugly head. Suddenly, large retailers were cutting their orders in half. Smaller retailers didn’t have the capital to make their orders at all. In addition, acquiring new business was almost impossible.

Was it time to get out of the business, he thought? No, he had been through tough times before. It wasn’t time to quit, it was time to be flexible. Flexible to the right customers, that is. Yes, the big manufacturers cut their orders in half, but was it a true lack of demand or simply a corporate measure to tighten belts? In some cases he found that they still had a strong demand for his product or for new products he hadn’t offered them yet. In those cases he extended an offer to give them product on trade credit, with very flexible payback terms. For the smaller retailers, qualifying them for trade credit was a matter of their sales, location, and overall viability of their store. If the writing on the wall included chapters 7, 11, or 13 then he made the smart decision of letting those customers go. However, stores with a strong upside, high traffic, and consistent sales were a good bet.

Providing those stores with intelligent trade credit proved to be a key move in customer retention. Before the economic crisis, there were new customers who approached his company for trade credit but were denied. Sure, some were denied simply because they were a bad bet, but others were denied for no other reason than he didn’t have to give anyone trade credit at that time; times were good. Some of those new businesses had real potential and it was his job to qualify them thoroughly and issue them trade credit. By doing this later on, he was able to plant a new crop of business that would flourish when the economy was fertile again.

If you’re a struggling business right now, we live in a country that allows you to fail and start again with options like bankruptcy or the liquidation of assets. However, if you know you’re business has a viable future and want to stay in for the long haul, open your mind to being flexible with your customers. Using trade credit is a powerful tool as long as it’s used in a balanced and strategic way. Keeping customers and getting market share in this economy might prove to be your greatest achievement to date.


[Image: Flickr user lecercie]

About the author

Alex Wathen is Board Certified in Consumer Bankruptcy Law by the Texas Board of Legal Specialization and also serves on the Board’s Bankruptcy Exam Commission. Has has offices in Austin, San Antonio, and Houston.