The Benefits and Management of Vendor Credit Accounts

Improve your company's financial position smartly

In any business operation, it is inevitable that at one point a business might need goods from its vendors in credit. The supplier or vendor can also owe a business some credit and this can be in form of over-payments done to the vendor or due to supply of faulty goods by the vendor. Such occurrences always come up in any business and it is therefore necessary to have a proper way of managing and tracking your business credit accounts.

Simply put, vendor credit is credit that a business receives from its vendors and this is usually considered as an equivalent of physical cash. Vendor credit accounts are an easy and most efficient way to manage this type of financing. When properly tracked, the running of the business becomes smooth and efficient.

Benefits of Vendor Credit Accounts

Vendor credit accounts have an advantage to both the vendor and the debtor. On the perspective of the creditor, vendor credit enables more sales by allowing the customers to make purchases even when they do not have immediate cash. Such flexibility in payments encourages customers to make high volume purchases and as such this gives more sales to the creditor. The interest fees due to the debtor are usually added revenue to the vendor. Moreover, late payment fees are usually charged to creditors and this in turn produces more revenue for the business.

From the perspective of the debtor, buying on credit enables the business to make purchases even when the cash balances are low. At certain circumstances in a business, the cash flow might be low or the business might be in too much debt that it can barely keep its operations afloat. At such instances, buying on credit is a good way to bring the business back on its feet.

Purchasing on credit also allows the company to make volume purchases when demand is higher and the cash supply for the business is low. Credit purchasing is thus an effective way for a business to revamp its operations and sales.

A vendor credit account also helps a business to build its credit file. It is important for a business to properly file and update their credit files. This is a good way for the business to show how it handles its financial responsibilities. A good credit file enables a business to secure business financing from a lender or a financial institution. If a business credit file shows a good payment history with several vendors, this can increase the chances of a business getting approval for financing. It is therefore necessary for a business to keep and update their credit files always. 

How to Properly Manage your Credit Files

It goes without saying that proper management is necessary in any business operations. When properly managed, a good credit file can prove to be a useful business transaction tool as well. First and foremost though, a business owner must understand when and what to record in a credit account. There are three main instances when a business ought to make records into their credit files.

First, when a business makes an advance payment to the supplier and the final bill is less than the amount paid. This is usually recorded as a vendor credit and can be paid at a later date by the supplier. 

Secondly, you make a record in your credit accounts when you receive goods on credit from your vendor. Such goods are usually supplied by the vendor and payments are made at a later date.

The third instance that requires recording is when a business receives damaged goods from its vendor that will require replacement. These are recorded as credit owed to the business by the vendor. 

To properly manage your credit files, precise and clear labeling of the account is paramount. This brings us to the major point of what to include in your supplier vendor credit account. First and foremost you must note the name of the vendor you receive credit from.

The date of receiving credit must also be clearly indicated against the name of the vendor. The credit note number should be noted too. This is a unique number assigned to each credit note. Most importantly, a description of the items given on credit should be noted down as well. The item description should include the quantity of each item and price per unit of the item.

In conclusion, vendor credit accounts are a necessary part of any business operation. Its benefits are both to the vendor and the reseller. When properly managed, a good credit file can increase and improve the financial position of a business operation.