What are Trade Payables?

Although it depends on what sector your business is in, you’ve likely dealt with suppliers and vendors at some point in your journey.

Businesses that produce and sell various goods often rely on suppliers and vendors. This would be for inventory and inventory related materials. In the harsh business environment, a good and reliable supplier can be worth their weight in gold.

Sometimes a business will buy a vendor’s items outright, and other times they may use different methods of payment. This is where trade payables come into play.

But what exactly are trade payables? Let’s take a closer look.

Here’s What We’ll Cover:

What Is a Trade Payable?

What Is the Difference Between Trade Payable and Accounts Payable?

Why Use a Trade Payable System?

Is There Risk Involved When Using a Trade Payable System?

Key Takeaways

What Is a Trade Payable?

A trade payable is an accounting term that signifies the money a business owes a specific supplier for its inventory related goods.

When a business chooses to pay their supplier using a trade payable system, they receive their goods first and then pay the supplier at a later date.

There is no hard and fast rule to trade payable relationships as it is unique to each business and vendor. They could pay per delivery, monthly or even a flexible payment schedule of up to a year.

The main thing is that both ends of the deal keep detailed balance sheets to keep track of each transaction.

What Is the Difference Between Trade Payable and Accounts Payable?

It is a common mistake to mix up trade payable and accounts payable. They are similar enough practices but there are slight differences between the two accounting terms.

Accounts payable is a business’s short-term obligation to pay off debt to suppliers or vendors. Trade payable is similar in that it also represents a debt. But it differs in that they apply specifically to inventory or inventory-related items.

Why Use a Trade Payable System?

There are a number of reasons that businesses use a trade payable system. Some of these reasons include:

Increasing Short-Term Liquidity

A business’s short-term liquidity is the ability to convert holdings and assets to actual funds in a short time frame. When a business increases their trade payable accounts, they will also be increasing their cash balances. This results in an increase in short-term liquidity.

Enabling Cash Flow

When a business purchases inventory using trade payable relationships then a company’s cash flow can open up.

This can be beneficial to a business as it can allow them some financial flexibility to secure employee salaries or pay some overheads. It can also help a business avoid taking a traditional bank loan which may have a high-interest rate.

Creating Stronger Business Relationships

When you’re dealing with a supplier for a long time then trust can be built if you have positive experiences. This can only be a benefit to both the supplier and the business as it builds a strong business relationship.

It can also help the chances of a supplier offering discounts or preferred pricing. This would be if a steady buying relationship is built and maintained over a long period of time.

Is There Risk Involved When Using a Trade Payable System?

As with anything, there is a certain amount of risk involved when using a trade payable system. These can include:

Missed Payments

As with any transfer of goods and funds, a late or missing payment can result in penalties and fees. It may also affect the reputation of your business. This can be avoided using accounting software to carefully keep a track of your orders.

Fraud

If you deal with a non-reputable supplier then there is a chance that you could fall victim to fraud. This would be by the vendor overcharging you or billing you for goods that you didn’t order. This can be easily missed on a yearly bill.

Key Takeaways

Using a trade payable system has a wide range of benefits for both a business and a supplier. You can build strong business relationships and save money in the long run.

However, you also need to be careful to keep a detailed record of what it is you’ve ordered and what the costs are. This is so that you don’t face an unnecessarily hefty bill at the end of your billing period.

Are you looking for more business advice on everything from starting a new business to new business practices?

Then check out the FreshBooks Resource Hub.

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