Trade accounts have been a cornerstone of business-to-business (B2B) transactions for centuries, tracing their origins back to ancient trade routes where merchants relied on credit arrangements to acquire valuable commodities. Today, they continue to play a vital role in facilitating commerce across a wide range of industries.
In this article, we'll look at exactly what trade accounts are, the benefits they offer to both merchants and buyers and how technology is enhancing them for the eCommerce age.
What is a Trade Account?
A trade account, also known as a business trade account or commercial trade account, is a financial arrangement between a merchant and its buyers. In a trade credit agreement, the trade accounts are opened and the credit is spent and repaid back into the account.
Trade Accounts allow buyers to make purchases within an assigned credit limit and defer payment for a predetermined period, typically 30 days. This arrangement enables buyersto manage their cash flow effectively, enabling them to receive goods and/or services without paying for them upfront.
From the merchant’s perspective, there is a strong incentive to offer trade credit via trade accounts as it often leads to increased sales & customer loyalty.
Let’s take a look at a a hypothetical example;
Morning Joe's Coffee Shop has entered into an exclusive agreement to purchase coffee beans from a new roastery, Lean Bean Machine. Lean Bean Machine has established a trade account for Morning Joe's, enabling them to order coffee beans as needed throughout the month. At the end of each month, Lean Bean Machine issues an invoice detailing the balance of the trade account for that period, with a pre-agreed payment term, typically 30 days.
This arrangement allows Morning Joe's to manage their inventory effectively, especially during periods of increased demand or unexpected spikes in business. By ordering additional coffee beans without the need for immediate payment, Morning Joe's can maintain a healthy cash flow. They are able to generate revenue from coffee sales before settling the invoice with Lean Bean Machine, thus supporting their financial stability and operational efficiency.
Advantages of Trade Accounts
Benefits for Merchants
- Increased Sales and Customer Loyalty: By offering trade accounts, sellers can attract new customers and retain existing ones, as the deferred payment terms make it easier for buyers to make repeat purchases.
- Reduced Risk of Non-Payment: Trade account providers often handle credit checks, payment collection, and debt management, mitigating the risks associated with extending credit to customers.
- Simplified Invoicing and Accounting: With trade accounts, sellers can consolidate multiple orders into a single invoice, streamlining their invoicing and accounting processes.
Benefits for Buyers
- Enhanced Cash Flow Management: Buyers can receive the goods and/or services they need without having to make immediate payments, allowing them to better manage their cash flow.
- Growth Opportunity: Trade accounts provide buyers with increased purchasing power, enabling them to acquire the necessary resources for their operations without depleting their available capital.
- Fostered Supplier Relationships: The trust and flexibility that comes with trade account arrangements can help strengthen the relationship between buyers and sellers, leading to more collaborative and long-term partnerships.
- Simpler Procurement Process: With trade accounts, buyers can streamline their procurement processes by consolidating multiple purchases into a single payment, reducing the time and resource spent on admin.
How Trade Accounts Work
Merchants have two options for offering trade accounts: manage the process in-house or outsource it to a third-party vendor.
In-House Trade Account Management
When a merchant handles trade accounts internally, it serves as both a seller and a creditor, giving credit terms to consumers directly rather than relying on external financial institutions or third-party credit sources. This approach requires the company to handle the credit process and associated risks, which include jobs like setting credit limits, analysing credit applications, supervising payment collection, and other related obligations.
While this approach offers more control over the trade account process, it also comes with several challenges:
- Expertise, Tooling & Processes: Merchants effectively become both a financing provider and a retailer when they are not dependent on other parties or financial institutions to grant credit. This demands significant investment in the tooling, processes & staff expertise.
If a merchant decides to build the tools required, there are considerable resource & time costs involved in the set up and maintenance of those systems.
Merchants that manage trade accounts in-house will also need dedicated staff with deep skills in credit management, financial analysis, compliance and relationship management. Hiring these individuals can be costly, but failing to have the necessary skills in-house can lead to financial losses and damage to relationships.
- Potential risk: Offering credit in-house always involves some level of risk, whether it’s in the form of delayed or even non-payment, it can represent a huge challenge for merchants. When a merchant manages trade accounts in-house it usually means the risk is taken on by the merchant from their own balance sheet, this can lead to bad debt & financial losses - whereas using a third-party provider can often mean outsourcing the credit risk (more on this later).
- Issues when scaling: Managing trade credit in-house can get harder as a business grows. With an expanded customer base merchants may need a larger team managing their trade accounts. Growing merchants will also need to take on a higher level of risk, the more buyers they have with trade accounts the credit they will need to extend.
Outsourcing to a Third-Party Provider
Businesses can also work with a third-party trade account service to take care of different parts of managing their trade accounts. These providers can give many different services, such as buyer onboarding, credit checking, processing payments, collecting debts, and more.
By outsourcing trade account management, businesses can benefit from several advantages:
- Comprehensive risk management: Third-party providers assist in credit risk assessment, setting spending limits and can offer guidance on credit policy adjustments. Merchants can effectively outsource the risk of their credit agreements to the provider, enabling them to continue offering credit to existing buyers and furthermore, have the confidence to extend credit to new buyers.
- Authentication experience: Merchants should look for providers that handle the authentication process in a streamlined, frictionless way. Buyers expect a payment experience to be simple, and through third-party providers you can offer seamless authentication.
- Setting the right limits & terms: Providers are usually able to provide more efficient authentication and creditworthiness checks, and provide the optimal spending limits for each buyer. As a result, merchant’s don’t unnecessarily reject good buyers or unwittingly accept bad buyers.
- Effective reporting: Providers often offer comprehensive reporting, enabling merchants to make data-driven decisions and optimise their trade account strategy. With the reduced effort in the other areas and clear reporting resources, internal teams have more time to spend understanding the performance of accounts, identify payment trends and find areas for improvement rather than focusing on the maintenance side of trade credit.
Offering Trade Credit with Kriya
The advent of online retail B2B ecommerce through digital platforms has transformed the way businesses offer, assess and recoup trade credit, using real-time data, APIs and automated assessment.
This includes B2B BNPL services and multi-channel credit tools such as Kriya which enable businesses to offer credit instantly, with fast digital underwriting, without using their own capital.
How it works:
- Instant buyer authentication & spending limits set
- Flexible payment terms
- Kriya pays you in full on delivery of order
- Kriya takes on the risk & handles payment collection
PayLater is driving real growth for our merchants:
- 40% Buyer Adoption
- 45% Revenue Growth
- 4x Increase in acquisition of new buyers
