Goods Credit

What is goods credit?

With a goods credit, a contract is concluded between the lender and the borrower. A product is purchased but not paid for in cash in a single sum. Instead a credit agreement is concluded for a specific amount and, at the same time, goods are handed over to the customer.

Goods credit is generally also referred to as trade credit or supplier credit. Accordingly, goods credit is used particularly often in commerce, especially in mail-order business.

Many large mail-order houses offer their customers goods credit if their creditworthiness is sufficient, which is intended to encourage more customers to make purchases. Especially for larger purchases, customers are often not able to pay the invoice amount at once. Goods credit can help here. After the contract is concluded between the mail-order company and the customer, the goods are handed over to the customer. The customer then repays the loan amount within the agreed payment term, usually plus interest. The goods purchased by the buyer are therefore in their possession, but the buyer only becomes the owner after the loan amount has been fully repaid. Goods credit always represents a potential risk for the supplier of goods; therefore the so-called retention of title applies until full payment for the goods has been made.

Supplier credit

A goods credit or supplier credit usually has short payment terms between 30 and 90 days. Unlike other types of credit, repayment is therefore scheduled over a very short period. If repayment is not made properly, the supplier can demand the return of the goods. A supplier credit is a form of an in-kind loan. A supplier credit often also includes trade credit insurance. It protects the supplier against payment defaults. Medium-sized companies can usually only poorly absorb credit losses of significant amounts. With trade credit insurance, these companies are protected against credit defaults. The granting of a goods credit is fundamentally at the discretion of the supplier. At mail-order houses, the customer's creditworthiness is checked before granting a goods credit. This is done by companies that specialize in assessing customers' creditworthiness. Using rating or scoring procedures, the customer's payment behaviour from previous purchases is analysed and classified. These data are transmitted to mail-order companies on request, which then grant the customer a goods credit for a purchase on that basis. However, the customer has no legal right to be granted a goods credit. The borrower can use this form of financing to secure a short-term loan. Typically, crediting begins with the delivery of the goods to the borrower. A corresponding payment period is set by the lender. As a borrower you should inform yourself very carefully here.

Legal tip: Pay particular attention to the payment term and the retention of title. Here there is often a chance to save real money, because sellers sometimes grant a cash discount for prompt payers.

Residual credit insurance

Especially for larger deliveries of goods, lenders often require residual credit insurance. This secures, if necessary, both survivors and sellers against a possible loan default. For laypeople, this can open up a world full of technical terms, about which one should inform oneself thoroughly in advance. A good business encyclopedia is a helpful resource to learn more about this area independently.

Advantages of goods credit

Goods credit offers advantages for the customer. Interest is usually charged for a goods credit at a certain rate, which can vary from provider to provider. The credit agreement is concluded with the purchase of the goods. Receipt of the goods must be acknowledged. To avoid payment defaults, a goods credit is generally granted only to customers with good creditworthiness. Goods credit has become indispensable in economic life.

Due to the comparatively short payment terms of usually 30 to 90 days, the debtor should carefully consider whether they can repay the goods within this period. Repayment can be made in a single sum or in several instalments. The repayment modalities are agreed in writing between the supplier and the customer for a goods credit. Goods credit is very frequently used by private individuals. The advantage for the customer is that they do not have to pay the required sum immediately and also receive the purchased goods promptly. They therefore pay later but receive the goods practically immediately.

A loan is generally related to "good faith", from which this term is also derived. The supplier hands over goods to the recipient in good faith that he will receive the purchase price. It is therefore expected that the customer will pay for the delivered goods on time. This usually happens and automatically leads to a positive credit rating of the customer in the event of a further purchase. In mail-order business, goods credit has a particular significance. Many customers wish to make use of goods credit when purchasing goods. Often the customer decides more quickly on a purchase if goods credit is granted. This type of credit is therefore of great importance to the economy.

Example of a goods credit

The following example may clarify the matter: Ms. M. buys goods worth 1,000 euros from a mail-order company. The nominal interest rate is 7 percent. Multiply the loan amount by the percentage. You then obtain the interest that would be payable in one year. In this case that is 70 euros. The loan amount is therefore 1,070 euros. Some goods credits may also incur additional surcharges. Divide the loan amount by the number of months, in this case 12 months. 89.16 euros are to be repaid monthly in this example.