The trade account definition is an account in which trade credit is spent and repaid. A trade account represents one of the most valuable lines of credit to any business. When trade credit is given, a trade account is established. Purchases of products from the company providing the trade credit accrue as a trade account payable for the customer.
A trade account, explained as the most valuable account for many small businesses, is a simple concept. As a business uses trade credit, to purchase goods or services from the providing vendor, the trade credit account grows a balance. This balance, forming the principal of this method of financing, then accrues with interest and forms a trade account receivable for the provider of products and financing. This will eventually be paid by the business receiving the trade credit.
As opposed to a normal account receivable, the trade credit account includes both interest and principal on the trade credit provided. In this way a trade account is unique from other accounts.
For example, Ben is starting his business. His drive is matched by his expenses and Ben must watch his finances carefully to minimize total cost while receiving the benefit of a purchase as soon as possible. For this, he must receive financing for his small business.
Ben decides to receive trade credit from one of his vendors. He likes that his business can receive what it needs before it can pay for it. He knows that as long as he carefully monitors his money he can properly plan for this expense.
To do this, he opens a trade account with his vendor. When Ben wants to receive supplies he simply provides the account number. This way, receives financing from his vendor rather than the business credit card. Ben knows that he will be charged interest on his trade account balance but is willing to pay it with the money he makes.
In the process of completing the trade account application, Ben was informed about maximum account balances, processing fees, the associated interest rate, and how to spend to the account. He made sure to pay close attention so as to minimize expense from this account.
Ben is happy he took the account. If he is able to reach his proforma projections he should be able to repay the balance within 2 months. From here, he will use the trade account as a way to delay payment and use the cash he has now. Ben looks forward to the future by working hard on the present.