Trade accounts for business: What are they and how do they work?

Trade accounts have been instrumental in facilitating business-to-business transactions for centuries. Their roots can be traced back to ancient trade routes where merchants from distant lands depended on trade credit arrangements to obtain silk, spices, and other precious goods. These credit agreements allowed them to acquire valuable commodities with the promise of settling their debts upon reaching their destinations, enabling the flourishing of cross-continental trade.

Fast forward to today, trade accounts continue to be the lifeblood of B2B trade for companies across almost every industry where there’s an established relationship between the seller and buyer. In this post, we’ll explain the key elements of trade accounts so that you can understand what they are, how they work, and how you can start offering them to your customers.

What is a trade account for business?

A trade account for business, often referred to as a “business trade account” or “commercial trade account,” is a financial arrangement between a business and its customers. It allows customers to place multiple orders over time within an assigned credit limit and defer payment for a predetermined period.

Here’s a quick example:

Let’s say you own a construction supply company called “BuildPro Supplies.” You offer a trade account to a local construction company called “Solid Builders Inc.” With this trade account, Solid Builders Inc. can make repeat purchases of construction materials and supplies from your company throughout the month on credit. They can settle these purchases together instead of paying separately for each order. Solid Builders Inc. receives the materials and supplies they need to complete their projects and get an invoice with a due date, typically with a 30-day payment term. For instance, if Solid Builders Inc. needs a shipment of lumber, concrete, and steel for a new project, they can order these materials from BuildPro Supplies and use them in their construction work. They don’t have to make an immediate payment at the time of purchase. Instead, they have a grace period to utilize the materials in their project and then pay BuildPro Supplies for the materials according to the agreed-upon net terms.

This trade account arrangement allows construction companies like Solid Builders Inc. to manage their cash flow effectively, ensuring they have the necessary materials for their projects without tying up their funds in upfront payments. It also fosters a mutually beneficial relationship between suppliers like BuildPro Supplies and their construction industry customers.

How do trade accounts work? 

Trade accounts serve as a valuable tool for businesses of all sizes. However, there are many factors to consider when it comes to how your business goes about offering these accounts. Businesses have two main options: create the systems and manage the processes of providing trade accounts in-house, or outsource these systems and management to a third-party provider. 

In-house

When your business handles trade accounts internally, it takes on a dual role as both the seller of goods and the creditor, extending credit terms directly to customers without relying on outside financial institutions or third-party credit sources. Consequently, your business will need to take on responsibility for the credit process and risks, which encompasses tasks like setting credit limits, evaluating credit applications, overseeing payment collection, and a range of other tasks. 

Here are a few considerations to keep in mind when weighing up whether or not to handle trade accounts in-house.

Resource & time intensive: Managing trade accounts in-house requires dedicated personnel to handle credit assessments, transaction processing, debt collection, and ongoing monitoring. These employees need experience in credit management, financial analysis, and relationship management. Additionally, your business must allocate office space, equipment, and software for these functions, which can increase your operational costs and limit investments in other areas that drive growth, innovation, or competitive advantage.

Expertise required: Effective trade account management demands specialized expertise. In-house staff must deeply understand credit risk assessment, financial analysis, legal compliance, and negotiation skills. Hiring and retaining such talent can be challenging and costly. Mistakes due to lack of expertise can lead to financial losses or damage trade partner relationships.

Limited scalability: As your business grows or experiences fluctuations in customers and sales, managing trade credit in-house can become increasingly challenging. Expanding the volume of trade accounts and transactions may require additional personnel and resources. Scaling up too quickly can strain your business’s capacity to manage credit effectively. Additionally, you may have difficulty offering trade accounts to new buyers due to the high risk involved, further inhibiting your business’s ability to scale. 

Risk exposure: Poorly managed trade credit in-house can expose your business to higher risks. Inadequate credit assessments or lenient credit terms can lead to delayed or non-payments, ultimately resulting in financial losses. Moreover, your business may struggle to react swiftly to changing economic conditions or customer financial instability, increasing the risk of bad debt.

Cost of non-payment: When a customer fails to make payments on time or default on their obligations, the costs associated with debt collection and legal action can be substantial. In-house debt collection efforts may not be as effective or efficient as those offered by specialized agencies, potentially leading to higher costs and longer recovery times. Utilizing a trade credit insurer is an option that offers varying levels of protection against non-payment risk. However, using such a service comes with significant costs and managing a trade credit insurance policy can be time-consuming and complex.

Third-party providers

Trade accounts work in various ways when using a third-party provider, depending on the specific services included and provider capabilities. Typically, when a third-party provider is used to facilitate the provision of trade accounts, they will take care of multiple aspects involved in managing these accounts, such as onboarding customers, credit risk checks, and payment collection. Here are a few things to keep in mind when deciding whether to offer trade accounts in-house or partner with a third-party provider.

Support for different legal entities: It is important to select a provider that can serve a broad range of business customers, as extending trade accounts to different legal entities can be challenging to facilitate in-house but can also be a powerful growth lever. Legal entities like corporations and sole proprietors, have different risk profiles and financial reporting requirements. They also have varying legal structures, affecting how creditors can collect on debts in the event of default. 

Trade account setup & verification: Third-party providers supply the systems and software to run the identity and credit checks and mitigate potential risks. This includes verifying the authenticity and creditworthiness of the customers through processes like credit checks and validation of trade references. 

Risk management: Assessing and mitigating credit risk is central to trade account management. Third-party providers often assist businesses in making informed decisions regarding extending credit to new trade partners. They may provide risk assessment reports, offer guidance on credit policy adjustments, and help diversify customers to reduce risk concentration.

Credit terms: Establishing credit terms is fundamental in trade account management. The third-party provider assists in defining clear and mutually agreed-upon payment terms, credit limits (the maximum amount of credit extended), and contractual terms. This ensures both parties understand their obligations and responsibilities within the trade relationship, reducing the potential for disputes.

Credit monitoring: Continuous monitoring of customer creditworthiness is crucial for risk management. The third-party provider often uses various tools and methods to monitor your customers’ financial health. This includes tracking payment histories, credit scores, and financial statements. If any concerning changes occur, such as deteriorating financial stability, the provider can alert your business or adjust the customer’s credit limit, enabling proactive risk management.

Transaction processing: The provider aids in the smooth flow of transactions between your business and its customers. This involves generating invoices, facilitating payment processing (which may include online payment gateways), and reconciling accounts. By handling these transactional aspects, the provider ensures accurate and timely payments, reducing the administrative burden on your business.

Payment collection: Providers typically assist in debt collection when customers fail to meet their payment obligations. This may encompass sending payment reminders, negotiating repayment plans on behalf of the business, and escalating collection efforts when necessary. The provider’s expertise in this area helps optimize debt recovery.

Reporting: Access to accurate reporting is essential for informed decision-making. Providers may offer access to reports and analytics that provide insights into trade account performance, payment trends, and potential areas for improvement. These reports help your business strategize and make data-driven decisions that drive growth.

Mondu’s Digital Trade Account solution 

Trade accounts are common in the realm of offline B2B sales, often reserved for well-established clients with enduring relationships due to the significant burden of managing these accounts and the risks involved. However, as B2B ecommerce continues to grow and competition among merchants rises, there’s a growing need to offer online trade accounts to new and established customers. 

Mondu’s Digital Trade Account solution provides a simple and risk-free way for B2B merchants and marketplaces to offer trade accounts to their business customers at scale. Mondu handles credit checks in real-time, assigns the appropriate level of purchasing power to customers, and consolidates all orders into a single statement. Merchants also benefit from upfront payments after each order, along with comprehensive protection against payment defaults and full support for payment collection and dunning.

These features enable merchants to seamlessly offer online trade accounts to their customers, boosting purchase frequency and spending while mitigating operational complexities and financial risks. Because Mondu bridges the trust gap, merchants can also offer trade accounts to new customers and turn them into loyal, long-term buyers.

How the Digital Trade Account enabled by Mondu works