Trade (commercial) credit is an opportunity to receive goods or services without bank intermediation precisely when farmers need them. After all, in agriculture, most tasks cannot be postponed. Financing for sowing, purchasing or repairing equipment, and harvesting must be done in a timely manner. Thanks to trade (or commercial) credits, farmers can receive goods on credit without lengthy bank approval procedures.
The mechanism of selling trade credits reduces lending risks for suppliers and eliminates the liquidity problem for farmers. In this article, we will examine in detail the features of trade credits, their types, advantages and disadvantages, and analyze why credit sales are mutually beneficial for all parties in this agribusiness financing model.
What is Trade Credit
Trade (commercial) credit is a type of agreement between seller and buyer about payment deferral for goods or services. It is concluded without the intermediation of banks or other financial organizations on terms agreed between the buyer and seller. This type of credit should be distinguished from both financial and consumer credit:
- Financial credit is provided only by credit organizations licensed by the NBU.
- Consumer credit, like trade credit, is provided for purchasing goods with deferred payment. However, only individuals are eligible for it, so it cannot be used for business purposes.
- Trade credit is an opportunity for businesses to obtain additional resources from suppliers.
What is trade credit? Trade credit is the oldest form of loan that existed even before money. Its essence was that the buyer received goods or services without payment at the time of receipt. Later, they compensated the seller’s expenses in the form of similar or other goods/services. This form of economic relationship was characteristic of societies that practiced subsistence farming. The need for such credits arose due to differences in production cycles. For example, if harvesting occurred in late summer or early autumn, this was when services or goods could be compensated to those who provided them at the beginning of the year.
In modern history, such credit has become an effective business tool for enterprises with limited liquidity. Because trade credits provide an opportunity to start the production cycle without the need for one-time payment for goods and materials (TM) that the business needs to purchase. For example, farms can start sowing without paying for seed material to the TM supplier. And the return of funds will occur when the farmer receives them from the sale of the harvest. These repayment terms are fixed in the agreement between buyer and seller.
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Statistical data shows that trade credits are the third most popular way of obtaining financing in Ukrainian agribusiness. For example, according to the Ukrainian Agribusiness Club, during the 2024 spring sowing campaign, 8.5% of funds ($544 million) were attracted through trade credits.
Advantages and Disadvantages of Trade Credits
Today, agricultural producers have a choice between traditional and innovative ways of attracting additional funds. The trade form of credit has changed significantly thanks to the latest technological solutions. For example, the WEAGRO service enables both agricultural producers and TM suppliers to use built-in financial instruments remotely. Thanks to this, farmers can conclude agreements with TM suppliers using only their EDRPOU code or TIN, and the supplier can receive money for their goods on the day of sale. Trade credit terms depend on the supplier, and WEAGRO provides the opportunity to purchase the desired goods on the day of agreement, that is, within a few hours.
But before making a decision about trade credit, consider its advantages and disadvantages, as trade credit is not only new opportunities but also obligations that the agricultural producer takes on.
Advantages of Trade Credits
- Ability to ensure the production cycle even in the absence of liquidity.
- Increase in business operations or ability to launch new projects.
- High speed of receiving goods/services due to absence of bureaucratic procedures.
- Possibility of repayment in both money and goods with TM supplier’s consent.
- Fixed price of goods or services at the time of sale. This relieves the buyer from additional payment during repayment if the price of goods/services has increased.
- Suppliers increase their sales of goods/services even when buyers have liquidity deficits.
- Ability to sell trade credit to other organizations, such as banks or other financial institutions.
Disadvantages of Trade Credit
- Certain forms of trade credit only allow financing of goods that belong to the category of current assets.
- The terms for returning money to the supplier are limited. Therefore, if it’s impossible to return them on time, it’s necessary to negotiate with the seller and sign a new agreement.
- Some trade credits are tied to the exchange rate at the time of repayment
Read also: What is installment: the difference between credit and installment
Types of Trade Credit
Trade credit is a flexible form of relationship between seller and buyer, therefore it is more variable. Below we characterize the most common types of trade credit.
Open Account
This form of credit is characteristic of companies that are in constant exchange relationships. In this case, they don’t need to conclude a new contract each time. The buyer receives goods or services when they need them and pays the seller according to the terms specified in the contract.
Company Credit
The most common form of trade credit, as it is one-time and does not depend on previous experience of mutual relations between business entities. When providing such credit, the buyer receives goods with deferred payment.
Bill Credit
This credit involves issuing a commercial bill. From the moment of its signing, it becomes a security and therefore can be sold or transferred to another person.
Seasonal Credit
Temporary company needs can be met through seasonal credit. For example, an agricultural producer regularly needs seasonal financing of current assets. Also, such credit can be useful when purchasing large volumes of goods that will be stored in warehouses.
Consignment
Payment for this trade credit occurs only after the seller’s goods are sold. Thus, the buyer receives the goods but only pays money in case of successful sale. If the goods are not sold, they are returned to the supplier.
Example of Trade Credit Calculation in the Agricultural Sector
Let’s illustrate how trade credit can be implemented, the types of which were described above. And let’s compare it with the services you can receive through the WEAGRO service.
Trade credit terms: the agricultural enterprise “Z NAMY VRODYT” needs more fuel and lubricants for the harvest period due to expansion of sowing areas. Due to lack of liquidity at harvest time, the owners decided to take a trade credit of 2000 UAH. This example of trade credit calculation provides the following repayment scheme: after 30 days (50%) and 70 days (50%), interest rate – 0.14% per calendar day. The rate is charged on the outstanding amount. As a result, the buyer will pay the seller the following amount:
- 1000 UAH – first credit payment after 30 days;
- 1000 UAH – second credit payment after 70 days;
- 116.67 UAH – interest for using trade credit;
- 2116.67 UAH – total amount that the buyer must return to the seller.
The WEAGRO service provides agricultural producers with the opportunity to conclude agreements with sellers on more favorable terms, as the commission is paid by the seller, not the buyer. At the same time, such an agreement is beneficial for TM suppliers, as with a small commission they significantly increase sales. In this case, if it’s necessary to pay for goods worth 45,000 UAH with a 90-day deferral, the farmer will pay the following amount:
- 0 UAH – Day 1;
- 15,000 UAH – Day 30;
- 15,000 UAH – Day 60;
- 15,000 UAH – Day 90.
Thus, trade (commercial) credit is a more flexible form of raising funds. It allows buyers and sellers to conclude agreements on mutually beneficial terms, without being tied to the NBU key rate and other conventions.
Trade Credit Sales in the Agricultural Sector
Trade credit is an important source of financing in the agricultural sector, which helps compensate for the seasonal nature of profit generation. The experience of foreign agricultural producers shows that such B2B relationships are more advantageous than using banking services. Moreover, trade credits can be sold to other players, so TM suppliers won’t have to worry about getting their money back. Let’s analyze how this practice is implemented worldwide and in Ukraine.
Trade Credit Sales Worldwide
Trade credit is the least accounted for type of credit in modern farming. The reason is that loans of goods or money often occur in interpersonal relationships or on a B2B principle, so information about them doesn’t reach state or financial institutions that collect statistical data. But some organizations provide credits for agribusiness on preferential terms. For example, in the USA, the Farm Credit System (FFCS) has existed for over 100 years, with assets currently at $180 billion. This organization provides about 35% of all loans made by US farms. Farmers can receive three types of trade (commercial) credits:
- Short-term – for financing operational expenses.
- Medium-term – for agricultural machinery.
- Long-term – for real estate financing.
Such credits can not only be provided but also sold or assigned to another organization. This makes them highly liquid, as if necessary, the party that provided this credit can get money for it through sale.
In the European Union, trade credits are most popular among small and new farms. This is because banks most often refuse to lend to them. According to the European Commission’s assessment, over 50% of applications from such farms are rejected by banks, while among established farms this level is 32%. The reason is clear: such farms belong to a high-risk industry. Therefore, innovative embedded financial solutions come to their aid. The mechanism of selling trade credits becomes a powerful stimulus for the development of this financial instrument. Because the party providing it reduces their risks and gets the opportunity to be more flexible in solving financial issues.
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Trade Credit Sales in Ukraine
The agricultural lending market in Ukraine can be very profitable for both goods suppliers and investors due to the significance of this economic sector. The share of agriculture in Ukraine’s GDP is 10.43%, and it’s larger than any other economic sector.
In Ukraine, thousands of agricultural producers use trade credits. And the turnover of funds in this sector reaches billions of hryvnias. Thus, according to the Ukrainian Agribusiness Club, for the 2024 sowing campaign alone, agricultural enterprises were provided with trade credits amounting to about 22.7 billion UAH.
The secondary market for financial instruments circulation in Ukraine is developing thanks to embedded financial solutions. More and more players seek to simplify relationships between buyers and sellers through an established mechanism for selling trade credits. The development of this market is somewhat slow due to the lack of unified rules, IT infrastructure, etc. But embedded financial innovations show their effectiveness, so more and more TM suppliers and agricultural enterprises are using their services. WEAGRO also works in this sector.
Advantages of Trade Credit Sales for Farmers
- Increased liquidity for suppliers and buyers. Selling trade credit portfolios allows TM suppliers to quickly obtain necessary liquidity for purchasing new resources. At the same time, farms receive liquidity for purchasing necessary materials and equipment.
- Reduced credit risk. Credit assignment allows suppliers to receive the money spent on credit even before the buyer pays the credit with deferral. This significantly reduces their financial risks as they don’t face issues of buyer default and credit non-repayment risk.
- Business scaling without time-predictable bank loans. Suppliers get the opportunity to direct additional funds to develop their business while waiting for bank loans. Lower financial debt servicing costs allow launching new business projects or expanding existing ones.
- Support for agribusiness from financial institutions. Selling trade credit portfolios can become a powerful stimulus for agribusiness development. Financial institutions interested in market expansion can offer advantageous specialized products to agribusiness.
- Reduction of unforeseen risks. Trade credit portfolios undergo thorough verification and approval before sale. This contributes to greater transparency of financial operations and reduces fraud levels.
- Risk diversification for financial institutions. Banks can diversify their risks by purchasing trade credit portfolios. By expanding their investments in the agricultural sector, they remove the problem of excessive risk concentration in particular areas.
- Implementation of innovations in agribusiness financing. New models of agribusiness financing make credits more accessible to small and new farms. This increases demand for embedded finance and not only diversifies the market of financial products but also stimulates the development of new ones.
Prospects for Trade Credit Sales in Ukraine’s Agricultural Sector
Trade credit sales can become a powerful stimulus for agricultural market development in Ukraine. The ability to quickly obtain liquidity without lengthy bank loans and avoid the risk of non-repayment opens new opportunities for suppliers. Instead of looking for ways to recover money from unreliable farmers, they can focus on developing their business. Trade credit sales is a beneficial mechanism that will allow banks and other financial institutions to finance agribusiness in Ukraine.
Today, there are still many tasks to be completed related to implementing unified rules, developing IT infrastructure, etc. But what is already being done in the field of trade credit sales gives positive results and helps support small and medium-sized farms. The WEAGRO online service allows agribusiness to receive agricultural installments for up to 180 days. At the same time, TM suppliers receive their money immediately, and WEAGRO takes on all financial risks. This gives suppliers instant access to liquidity, significantly increases their sales, and promotes business development. If you have your own business in the agricultural sector, transparent and instant financial solutions from WEAGRO will help create new relationships with TM buyers. And for farms, this is a unique opportunity to receive necessary goods without additional costs.
