Trading on credit

Trade credits are accounted for by both sellers and buyers. Accounting with trade credits can differ based on whether a company uses cash accounting or accrual accounting.

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Accrual accounting is required for all public companies. With accrual accounting a company must recognize revenues and expenses at the time they are transacted. Trade credit is most rewarding for businesses that do not have a lot of financing options. In financial technology, new types of point of sale financing options are being provided for businesses to utilize in place of trade credits. Many of these fintech firms partner with sellers at the point of sale to provide 0% or low interest financing on purchases. These partnerships help to alleviate trade credit risks for sellers while also supporting growth for buyers.

Trade credit

What is a trade credit?

A trade credit is a business-to-business (B2B) agreement in which a customer can purchase goods on account without paying cash up front, paying the supplier at a later scheduled date. Usually businesses that operate with trade credits will give buyers 30, 60, or 90 days to pay, with the transaction recorded through an invoice. Trade credit can be thought of as a type of 0% financing, increasing a company’s assets while deferring payment for a specified value of goods or services to some time in the future and requiring no interest to be paid in relation to the repayment period.

Trade credit

Understanding trade credit

A trade credit is an advantage for a buyer. In some cases, certain buyers may be able to negotiate longer trade credit repayment terms which provides an even greater advantage. Often, sellers will have specific criteria for qualifying for trade credit.

A B2B trade credit can help a business to obtain, manufacture, and sell goods before ever having to pay for them. This allows businesses to receive a revenue stream that can retroactively cover costs of goods sold. Walmart is one of the biggest utilizers of trade credit, seeking to pay retroactively for inventory sold in their stores. International business deals also involve trade credit terms. In general, if trade credit is offered to a buyer it typically always provides an advantage for a company’s cash flow.

The number of days for which a credit is given is determined by the company allowing the credit and is agreed upon by both the company allowing the credit and the company receiving it. Trade credit can also be an essential way for businesses to finance short-term growth. Because trade credit is a form of credit with no interest, it can often be used to encourage sales.

Since trade credit puts suppliers at somewhat of a disadvantage, many suppliers use discounts when trade credits are involved to encourage early payments. A supplier may give a discount if a customer pays within a certain number of days before the due date. For example, a 2% discount if payment is received within 10 days of issuing a 30-day credit. This discount would be referred to as 2%/10 net 30 or simply just 2/10 net 30.

Key takeaways

Trade credit is a type of commercial financing in which a customer is allowed to purchase goods or services and pay the supplier at a later scheduled date.

Trade credit can be a good way for businesses to free up cash flow and finance short-term growth.

Trade credit can create complexity for financial accounting.

Trade credit financing is usually encouraged globally by regulators and can create opportunities for new financial technology solutions.

Trade credit accounting

Trade credits are accounted for by both sellers and buyers. Accounting with trade credits can differ based on whether a company uses cash accounting or accrual accounting. Accrual accounting is required for all public companies. With accrual accounting a company must recognize revenues and expenses at the time they are transacted.

Trade credit invoicing can make accrual accounting more complex. If a public company offers trade credits it must book the revenue and expenses associated with the sale at the time of the transaction. When trade credit invoicing is involved, companies do not immediately receive cash assets to cover expenses. Therefore, companies must account for the assets as accounts receivable on their balance sheet.

With trade credit there is the possibility of default. Companies offering trade credits also usually offer discounts which means they can receive less than the accounts receivable balance. Both defaults and discounts can require the need for accounts receivable write-offs from defaults or write-downs from discounts. These are considered liabilities a company must expense.

Alternatively, trade credit is a useful option for businesses on the buying side. A company can obtain assets but would not need to credit cash or recognize any expenses immediately. In this way a trade credit can act like a 0% loan on the balance sheet. The company’s assets increase but cash does not need to be paid until some time in the future and no interest is charged during the repayment period. A company only needs to recognize the expense when cash is paid using the cash method or when revenue is received using the accrual method. Overall, these activities greatly free up cash flow for the buyer.

Trade credit trends

Trade credit is most rewarding for businesses that do not have a lot of financing options. In financial technology, new types of point of sale financing options are being provided for businesses to utilize in place of trade credits. Many of these fintech firms partner with sellers at the point of sale to provide 0% or low interest financing on purchases. These partnerships help to alleviate trade credit risks for sellers while also supporting growth for buyers.

Trade credit has also brought about new financing solutions for sellers in the form of accounts receivable financing. Accounts receivable financing, also known as invoice financing or factoring, is a type of financing that provides businesses with capital in relation to their trade credit, accounts receivable balances.

From an international standpoint, trade credit is encouraged. The world trade organization reports that 80% to 90% of world trade is in some way reliant on trade finance. Trade finance insurance is also a part of many trade finance discussions globally with many new innovations. Liquidx for example now offers an electronic marketplace focused on trade credit insurance for global participants.

Research conducted by the U.S. Federal reserve bank of new york also highlights some important insights. The 2019 small business credit survey finds that trade credit finance is the third most popular financing tool used by small businesses with 13% of businesses reporting that they utilize it.

Trade credit has a significant impact on the financing of businesses and is therefore linked to other financing terms and concepts. Other important terms that affect business financing are credit rating, trade line, and buyer’s credit.

A credit rating is an overall assessment of the creditworthiness of a borrower, whether a business or individual, based on financial history that includes debt repayment timeliness and other factors. Without a good credit rating, trade credit may not be offered to a business. If businesses do not pay trade credit balances according to agreed terms, penalties in the form of fees and interest are usually incurred. Sellers can also report delinquencies on trade credit which may affect a buyer’s credit rating. Delinquencies affecting a buyer’s credit rating can also affect their ability to obtain other types of financing as well.

A trade line, or tradeline, is a business credit account record provided to a business credit reporting agency. For large businesses and public companies, trade lines can be followed by rating agencies such as standard & poor’s, moody’s, or fitch.

Buyer’s credit is related to international trade and is essentially a loan given to specifically finance the purchase of capital goods and services. Buyer’s credit involves different agencies across borders and typically has a minimum loan amount of several million dollars.

Trading credit spreads for a living and how to get started

Watch our video on trading credit spreads for a living.

Trading credit spreads for a living & how to get started

Did you know that trading credit spreads for a living is a way to generate income while minimizing risk? Options trading allows you to make money in any market.

It doesn't matter if the market is trading up, down or sideways. There is an options trading strategy to make money. Hence the popularity of options.

Options give you the right but not the obligation to buy (call) or sell (put) a stock at a specified price. Read our post on put and call options explained.

One options contract controls 100 shares of a stock. As a result, trading options is cheaper. However, options have more moving parts than a stock. These moving parts affect the price of a stock much more than trading shares.

This can be both good and bad. You can have a bigger return on your investment but also lose a lot more. So if you're trading options, trading credit spreads for a living allows you to do trade a strategy that minimizes your risk.

1. Credit: trading credit spreads for a living

You can't buy one option for one stock and sell an option for another stock. That just becomes buying and selling naked calls and/or puts.

With a credit spread, the money in credited to your account at the start of the trade. This strategy was designed to make a profit when the spreads between the two options narrows.

Credit spreads can be bullish or bearish. As a result, you need to make sure you choose the correct direction when you're trading credit spreads for a living.

2. The pros and cons

Trading credit spreads for a living may limit risk. Although, the trade off is the limiting or profit potential. However, if this is how you generate income, the limited risk is better for you.

Sure a naked call or put has the possibility for unlimited profit. However, the risk of a bad loss is real. As a result of having many moving parts to options, things like time decay, intrinsic value and implied volatility can impact how much you make or lose. Read our post on the implied volatility formula and its meaning.

Spreads cap loss if the stock moves dramatically in the opposite direction. We all know the stock market moves off of emotions. Any news, whether good or bad, will move the market or a stock.

There's never going to be perfect market conditions for trading. In fact, the ability to minimize risk is more important than trying to hit a home run on every trade.

If you've looked at the charts and see a clear chance to make a large profit by placing a naked options trade, then take that risk. If you're relying on your trading profits to make a living, then take the safer way.

Sure your profit potential is limited but you can still make a few hundred dollars a trade without putting up a lot of money.

Again, if trading credit spreads for a living is your income, the limited risk is ideal. In fact, you're able to discuss this in our trading room.

3. The types of credit spreads

There are different types of credit spreads. The credit spread also known as a vertical spread. A credit put spread also known as a bull put spread. The credit call spread is also known as a bear call spread.

A credit spread or vertical spread is simultaneously buying and selling calls or puts with different strike prices. A bull put spread is a bullish position where you make more money on the short put.

A bull put spread is best used when the market consolidates or the stock you want to trade is rising. In essence, you can use this strategy for two different occasions

A bear call spread is a bearish position where the money comes from the short call. You use this position when you believe the market or stock is hitting its peak.

Make sure you practice trading these spreads before using real money. You want to see how they work and if you're using them correctly with the way the markets and stocks are moving.

Our service is a great place to come in order to learn more about trading credit spreads for a living.

4. The goal of trading credit spreads for a living

Trading credit spreads for a living means your goal is to get a net credit. This is your income and you can't make any more money than that. The way you get a credit is by the premium you pay for when you purchase the option is lower than the premium you pay for the option you sell.

To keep your entire credit you want the spread you're selling to expire worthless. However nothing is ever perfect. If you have a good profit then it might be a good thing to go ahead and take it. You never go broke taking profit.

Does opening a stock trade account get on your credit report?

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You want to open your own online stock trading account, but you're worried that doing so will damage your credit report. It's true that online stock trading companies will check your credit before signing you up. And it's true, too, that these checks will show up in your credit report. But there's good news, such a check will have little negative impact on your three-digit credit report.

Stock trading companies do check your credit before opening an account for you, and this inquiry will show up on your credit report, but has very little impact on your credit score.

Credit check

When you sign up to create an online stock trading account, the company offering this account will check your credit history. These companies want to know that you are who you say you are. They also want to make sure that you have a history of paying your bills on time and not defaulting on your loans.

Why credit score matters

Lenders of all types, whether they're originating mortgage, auto or personal loans, rely on your three-digit credit score to determine how likely you are to default on your payments. If your score is high, it indicates that you have a history of paying your bills on time. If it is low, it suggests that you have a history dotted with missed or late payments.

If your score is too low, lenders won't lend to you. If you do qualify for a loan with a low credit score, you'll have to pay higher interest rates. In general, lenders reserve their lowest interest rates for consumers with credit scores of 740 or higher on the popular FICO credit-scoring system.

What impacts your score

Several factors impact your credit score, according to the myfico.Com website. Late payments, missed payments and negative judgments – such as housing foreclosures or bankruptcy filings – will drop your score. Your score will also fall if you have too much credit card debt. Certain types of credit inquiries – though not all of them – will hurt your credit score. This includes inquiries from companies offering online stock trading.

Minimal impact

The good news is that the inquiries made by online stock trading companies will have little impact on your credit score. Myfico.Com says that credit inquiries generally drop people's credit scores by a negligible amount.

The more serious credit inquiries come from credit card companies. If you open too many credit cards at once – and all of these credit providers will check your credit – the credit bureaus become nervous. They view customers with too much access to credit as having higher chances to run up overwhelming credit card debt, something that could result in missed payments as consumers become burdened with high credit card bills.

Credit trading

For financing needs that conventional products cannot satisfy

Cash and working capital are key to the success of any company. The financing of trade in your company’s lifecycle, whether you’re buying or selling goods, services or commodities, enables you to offer more competitive terms to win business and mitigate payment risk. There are a number of instruments you can use to finance trade flows.

Some of the benefits

Trade finance credit

Extensive african presence

Credit-linked notes

Credit risk analysis

Do you need to enhance your working capital?

Liquidity is an important factor in any business, giving you the ability to quickly convert assets such as investments, accounts receivable, and inventory into cash.

As africa’s dominant provider of credit-based liquidity, our innovative structured credit products are delivered through innovative credit combinations that provide you with access to both african and global asset pools that you could not access independently.

As a leading trader and market-maker in both developed and emerging market cash and derivative products we specialise in enhancing credit yield in customised structures that match your risk-return profiles.

Trade finance credit: one of the biggest challenges faced by companies trading in africa is the gap in trade finance, especially in relation to credit availability.

Managing credit risk: you need to stay on top of business credit risk management by having access to the information you need on market changes.

Credit-linked notes: as with many other credit derivatives, these are used to help manage both your exposure to credit risk and your balance sheet.

Trusted expertise: we understand that you need a banking partner that you can trust. Our expertise in africa and globally, provides you with trusted insights and skills to navigate credit opportunities.

International trade involves buying and selling across countries that have very different financial and legal systems, environments and cultures.

Our unique and extensive presence across the african continent, combined with our proven capabilities and expertise in developed capital markets, provide the insight and skills you need to successfully link emerging and frontier credit opportunities with developed market credit, through transactions that are globally compliant.

African economies are impacted differently by global macroeconomic factors, which necessitates a case-by-case approach when analysing credit risk.

Our in-depth knowledge of discrete african credit markets allows us to access credit on-the-ground.

We have pioneered the structuring of multiple credit linked note programmes, in both ZAR and non-ZAR listed notes, that leverage african and global credit, and we are currently among the top 15 global issuers of credit notes.

Do you need to enhance your working capital?

Liquidity is an important factor in any business, giving you the ability to quickly convert assets such as investments, accounts receivable, and inventory into cash.

Trade finance credit: one of the biggest challenges faced by companies trading in africa is the gap in trade finance, especially in relation to credit availability.

Managing credit risk: you need to stay on top of business credit risk management by having access to the information you need on market changes.

Credit-linked notes: as with many other credit derivatives, these are used to help manage both your exposure to credit risk and your balance sheet.

Trusted expertise: we understand that you need a banking partner that you can trust. Our expertise in africa and globally, provides you with trusted insights and skills to navigate credit opportunities.

International trade involves buying and selling across countries that have very different financial and legal systems, environments and cultures.

African economies are impacted differently by global macroeconomic factors, which necessitates a case-by-case approach when analysing credit risk.

Our in-depth knowledge of discrete african credit markets allows us to access credit on-the-ground.

We have pioneered the structuring of multiple credit linked note programmes, in both ZAR and non-ZAR listed notes, that leverage african and global credit, and we are currently among the top 15 global issuers of credit notes.

Trading on credit

We know that running a business isn’t easy, and that time is money. That’s why we created the toolstation trade credit account, to give you more control of your cash flow, and more time to spend doing the profitable part of your job.

With a toolstation credit account you’ll get a flexible credit limit with up to 60 days to pay. And the best bit? It’s so easy to apply that you could start using your new account in just a few days.

Toolstation Trade Credit Account - Tradesman

BETTER FOR YOUR BUSINESS

Apply today and your business could soon benefit from:

FLEXIBLE CREDIT LIMIT

Control your finances with a credit limit that suits the needs of your business

UP TO 60 DAYS TO PAY

Buy the tools and supplies now, pay later once you’ve been paid by the customer

ADDING TRUSTED EMPLOYEES

Work in a larger team? Add them to your account and get on with your job

ONLINE ACCOUNT MANAGEMENT

See your monthly statements, order history and make payments online

APPLY NOW IN TWO SIMPLE STEPS

1. Make sure you have the following details* and electronic copies of the required documents ready to upload:

Full company/proprietor details (including trading name and company registration number where applicable)

A copy of ID (valid driving license or passport) for the authorised individual signing the application (proprietor/partner/director). See terms for accepted signatories

A copy of your or bank statement dated within the last three months (business or personal)

A copy of a company invoice or letterhead (e.G. Compliment slip, headed letter)

2. Click ‘apply now’ and complete the application form in just a few minutes.

*providing the correct details helps ensure that your application can be processed quickly and minimises potential delays completing your application.

About the toolstation trade credit account

Q. What is the trade credit account?

The toolstation trade credit account offers trade and business customers up to 60 days free credit to help with cash flow, flexible credit limits and online account management. It’s the simple way to buy the tools and supplies you need from toolstation online or at any of our nationwide stores, and pay later. Please note that acceptance for a trade credit account is subject to status and for business customers only. We can also provide access and cards for your employees to make things easier for your business.

Q. How do I apply for a toolstation trade credit account

It’s easy, go to toolstationcredit.Co.Uk and click ‘apply now’. Please be sure to have the following details and electronic copies of the required documents ready to upload before starting your application:

Full company/proprietor details (including trading name and company registration number where applicable)

A copy of ID (valid driving license or passport) for the authorised individual signing the application (proprietor/partner/director). See terms for accepted signatories

A copy of your or bank statement dated within the last three months (business or personal)

A copy of a company invoice or letterhead (e.G. Compliment slip, headed letter)

This will help ensure that your application can be processed quickly and will minimise any further delays completing your application. The application process can take from 2 to 5 business days.

Q. Where can I use my trade credit account card?

You can make payments using your trade credit account for orders online at toolstation.Com, in any toolstation store or by phoning the toolstation contact centre on 0330 333 3303. The toolstation trade credit account cannot be used in any other travis perkins group businesses or retailers.

Q. How do I use my trade credit account?

Using your trade credit account is simple. To use in store, either present your toolstation trade credit account card or you can present the QR code for your trade credit account on your smartphone screen to one of our store colleagues when paying for your order.

Q. When will my invoices become available?

You should receive an invoice by email within 48 hours of placing your order, and we’ll send you monthly statements so you know exactly what you’re spending.

Q. How up-to-date are the account details on-screen?

The details shown on-screen in your account are the most up-to-date information we have, up to the end of the last banking day. Your current balance may not display purchases and payments made in the last 48 hours. This can take a little longer over weekends and bank holidays due to bank operating restrictions.

Q: who should I contact if I have any questions regarding the trade credit account?

If you need help regarding your trade credit account please contact us on 0300 600 5001. You can also use the live chat or send an email to tradecredit@toolstation.Com.

General queries

Q. How do I add additional cardholders to my account?

You can add additional cardholders to your trade credit account, allowing other individuals approved by you, to make purchases from toolstation on your account.

You can do so by accessing the manage additional cards tab in your account page and clicking on “add account holder”. You will be asked to provide the contact and address information of the new users.

Additional cardholders will be able to transact in branches and online using your trade credit account limit. For security purposes they will not be able to see your credit limit and will not have access to the payment portal.

Q. How do I remove additional cardholders from my account?

You can use this functionality if one of your employees has left the business, for example. To remove their access, click on manage additional cards tab in your account page and click on the “edit” button next to the cardholder’s name. You will then need to untick the “active user” button and click “done”. By following these steps the account will be removed straight away.

Q. What if I’m missing an invoice or statement, or require a copy?

You can download your invoices at toolstation.Com via the ‘order history’ tab. If you need a statement you will need to log in to the high radius portal (our third party provider) by clicking on the “payment portal” button in the trade credit account tab on our website.

Q. What’s the difference between the toolstation trade credit account and the toolstation trade credit card powered by barclaycard?

The toolstation trade credit account is managed by toolstation and gives you access to 60 days interest free credit on any purchases made exclusively in toolstation.

The toolstation trade credit card, powered by barclaycard is a credit card managed entirely by barclaycard commercial cards and applications subject to barclaycard approval process.

Q. Why can’t I have the credit amount that I’ve asked for?

Credit limits are offered based on the financial information available at the time of your application and are regularly reviewed. We will try and increase once we see your trading history and will authorise depending on the results of the credit check

Q. Can I apply for a change to my credit limit?

Whilst credit limits are regularly reviewed any requests for a change to your current credit limit can only be submitted through the trade credit account pages online. We cannot process requests made via any other contact method such as email or phone.

Making payments

Q. When do I have to make payments?

Invoices are due and payable 30 days after the end of the month in which the goods were purchased. For instance, if the goods were received on july 15th, payment is due on 31st august.

Invoices must be paid in full on the due date. Failure to do so may result in interest being charged to your account. For full terms and conditions please see trade credit account terms.

Q. How do I make a payment?

Debit or credit card: please access the payment portal at https://www.Toolstation.Com/account/trade-credit.

Bank transfer: account name toolstation ltd, sort code 60-24-37, account number 40670422. Please quote your toolstation trade credit account number (you can find it on your statements and invoices).

Payments to your balance cannot currently be accepted in any of our branches or through the customer contact centre.

Q. How do I ensure that a payment made via bank transfer is allocated to specific invoices?

Payments will be allocated to your oldest transactions, unless you send us a remittance clearly quoting the invoice numbers and amounts included in your payment.

Please send your remittance details to remittance@toolstation.Com including your company name and toolstation trade credit account number within the subject line. Please upload the remittance in a PDF format.

Q. What happens if I make a part payment on my account?

We always try to match the payment to the correct invoices, but part payments could sit unallocated on your account while we try to do so. This is why it’s important you send us the remittance advice. The payment will still be taken into consideration when calculating your outstanding balance.

Q. If I make a payment online, when will it appear in my account?

The payment will usually show on your account within 48 hours of you submitting it (this can take a little longer over weekends and bank holidays).

About this website

Q. Are my card details secure when making a payment?

Yes. We use a secure service offered by an accredited third party, which uses a dedicated secure system. Card details are verified by your bank before the payment is accepted, although you may be prompted to sign up to ‘verified by visa’ or ‘mastercard secure code’ depending on your bank.

If you are concerned by the security of your details, or you are having issues making a payment, please visit toolstation.Com/contact

Q. Can I update my trade credit account details online?

Yes. Some details on your account can be updated, including contact details and address. Simply login to your account online before making any changes. Changes to your toolstation account will need to be made via the my account section of the toolstation website once logged in.

Q. I’ve forgotten my password, how do I reset?

Difference between credit trading and rates trading?

Hey, is there a difference between credit trading and rates trading?

I thought they are both just trading bonds?

Rates trading vs. Credit trading?

At a broad level, rates trading has a macro-economic focus looking at economies and interest rates. Credit trading has a micro-economic focus and looks at specific debt securities such as corporate bonds.

What is rates trading?

Interest rates trading revolves around more macro credit products such as government bonds and interest rate swap products. Threse roles will be heavily focused on the yield curve, inflation in different geographies, and monetary policy.

What is an interest rate swap?

An interest rate swap is an agreement between two parties to exchange interest payments to create a marginally lower interest rate payment on both sides. This usually involves exchanging fixed vs. Floating interest rates.

What is credit trading?

As previously mentioned, credit trading is more based on micro analysis such corporate bonds and credit default swaps.

What is a credit default swap?

A credit default swap transfers the credit exposure of a fixed income product between parties. The buyer of the swap makes payments to the seller. This acts like an insurance in the event of a negative credit event - such as default - at which point the seller will pay the buyer a premium.

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Comments ( 27 )

In short. They are not as similar as you'd think. Credit is micro focus while rates is macro. Both fields also have derivatives products that aren't bonds (ie swaps).

IRS? Internal revenue service? What do you trade there?

You are either paying a fixed rate and or receiving a fixed rate. If you are paying a fixed rate, you are receiving LIBOR and hope that rates increase. If you are receiving fixed, you are paying LIBOR and hope that rates fall. There is a lot more to IRS, but that is the general idea.

Gracias. I now realise how retarded my post was.

Are the exit opps slightly different for these two. For instance it seems long/short type RV hedge funds would rather hire credit people and global macro hedge funds would rather hire rates people?

Well, credit people would be more likely to go to a debt fund than equity, but yes, rates would be more likely go to global macro funds if they were to leave the sell-side.

Like I said, very different focus in rates vs credit.

To anyone that works in fixed income

Can u comment on choosing between corporate credit and emerging market credit

Trying to decided between the 2 but am leaning toward em as i feel it has a more macro feel than corporates

to anyone that works in fixed income

Can u comment on choosing between corporate credit and emerging market credit

Trying to decided between the 2 but am leaning toward em as i feel it has a more macro feel than corporates

Look up bondarb's (I think it was him) post on EM trading, it was really extensive.

To anyone that works in fixed income

Can u comment on choosing between corporate credit and emerging market credit

Trying to decided between the 2 but am leaning toward em as i feel it has a more macro feel than corporates

If you like to monitor company news and performance,choose equity.If you prefer to monitor economic news (i.E. Unemployment,growth) and mostly interest rates,choose EM.

One of the best posts on WSO .

Rates trading (originally posted: 05/28/2010)

Apologies about being basic but just learning about this stuff but can some explain:

1) what are various subgroups within rates each trader will be separated into trading and which gets what skill sets?

2) can some explain to me what the actual job is like day to day? Walk me through what the role actually is?

3) common interview questions

Q's have already been discussed by a few traders on here. Search a little and you'll find it.

Plenty of sites have the "day in the life of s&t intern". Check out M&I, they have some info.

Thanks for this, i checked that out
but in terms of strengths and interests, can anyone define say what one needs to be good at
on a corporate bond sales desk versus em credit sales (also then em credit at JEF, where fx is not even offered)

Don't know if this is true, but i had heard that many of the corporate bond sales positions have been eliminated in the past 15 years

Query on credit and rates trading (originally posted: 12/22/2006)

1) guide me to some good resources on credit and rates trading

2) throw light on the business prospects of credit and rates trading (whether it is a hot thing in the market/sought after etc)

Rates is a mature market, other than the structured stuff. Credit trading is the 'hotter' market, but the two are quite different. I've worked in both

Re: going into credit trading, would you advise against going into this sort of role given the current environment? Or do you think there'll be a pickup in activity (and bonuses?) once all this mess gets cleaned up (12-18mths?)

What are you looking at in the EM? Are you looking at a liquidity desk or a capial rasing type gig? For markets like the US treasuries these jobs are sometimes sub divided into different groups, not 100% if the ems teams will do this though.

Rates trading position at hedge fund - question (originally posted: 07/13/2011)

Yet another interview for trading position. This time it is for a trading position in rates with a hedge fund. From what I understand, the role will ultimately lead to a position in portfolio management.

Also, what sort of questions should I expect?

Any advice would be highly appreciated.

I would say it strongly depends on the precedent in the fund, on your background. What is your prior experience/education?

My background: tier1 macro fund (soros, tudor, moore, etc)

I would say it strongly depends on the precedent in the fund, on your background. What is your prior experience/education?

My background: tier1 macro fund (soros, tudor, moore, etc)

I can't comment on interview questions specifically, as rates is not my area, however in terms of your other questions, my views are as follows (I know there are some rates traders here who can comment further):

1 - at a junior level, the compensation on the buyside is typically lower - some may disagree, but i've worked in two tier 1 ($15-30bn) hedge funds, and this is always the case, unless you're incredibly lucky or they're incredibly generous.

2 - you may be lucky enough to have a book on the execution desk, where you can punt ideas, or you may also simply find that your job is passing an order from one guy (PM) to the next (sellside sales).

3 - in practice, going from being a senior, risk-taking, sellside trader to a hedge fund PM is far more common than going from execution to PM.

The real answer is that there is no real answer - you may get lucky, join a great fund which trains you well, and turns you into a PM, or you may find yourself stuck in execution. If you can get into a strong IB which has a decent book, that is undoubtedly the lower risk option.

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Trade credit insurance

On 4 june, the government announced the establishment of a temporary government backed £10bn trade credit reinsurance scheme. Since alerting the government in early april to the challenges faced by the industry and businesses they support across the country, the ABI has worked with members to evidence the scale of the challenge and the importance of establishing a reinsurance scheme to ensure that the industry has the confidence to continue providing the cover needed by many sectors across the economy.

In response to the announcement the ABI issued a press statement welcoming the scheme.

What is trade credit insurance?

Trade credit insurance provides cover for businesses if customers who owe money for products or services do not pay their debts, or pay them later than the payment terms dictate. This could result from businesses not being able to pay for goods and services delivered as the result of coronavirus. For further information, read our guide here.

Is there any business cover against suppliers going insolvent?

Trade credit insurers do not provide cover for loss of production volume or the insolvency of a supplier, only the failure of a customer to pay for purchased goods. It is primarily insurance to cover the potential failure of a customer to pay for goods and services rendered in the event of insolvency or in the event of late payment.

Is my business covered by insurance against delays in payments across the supply chain?

Trade credit insurance provides coverage for delayed payments, ensuring that late payments do not put your company under financial strain.

What if I am trading with a region affected by covid-19?

Insurers will assess trade on a case by case basis for those countries/regions that are experiencing the most severe impact of the virus. Insurers may set specific conditions or credit levels for such trade.

What is the temporary state-backed support scheme announced by the government?

Because of the unprecedented financial pressures being faced across most business sectors, the government has acted on our proposal to ensure that businesses can obtain trade credit insurance as they recover from the impacts of covid-19.

Under this temporary scheme, the government will share the risk of losses arising from business insolvency with insurers. Insurers will take 10% of claims that result from business failure while government will take 90% of the premium and claims. This will help trade credit insurers to continue to provide insurance for a wide range of businesses across the country by maintaining levels of cover than they otherwise would not have been able to do.

UK businesses covered by trade credit insurance will be included automatically in the scheme if their insurer participates in it.

Letters of credit for importers and exporters

Letters of credit and how they can be used to reduce risk in international trade.

Introduction

Importing and exporting involves risks. Exporters run the risk of buyers failing to pay for goods, while importers may risk paying but never receiving anything. Because of the distances involved, it may be difficult to resolve any disputes.

One way of reducing the risks is to use a letter of credit - sometime known as ‘documentary credit’. This can offer a guarantee to the seller that they will be paid, and the buyer can be sure that no payment will be made until they receive the goods.

There are several different types of letters of credit available to use, depending on the circumstances.

This guide explains what letters of credit are, how they work, and when you might consider using one. It looks at some of the drawbacks of using a letter of credit and explores some possible alternatives. It also explains the international rules that govern most letters of credit.

What is a letter of credit?

A letter of credit is basically a guarantee from a bank that a particular seller will receive a payment due from a particular buyer. The bank guarantees that the seller will receive a specified amount of money within a specified time. In return for guaranteeing the payment, the bank will require that strict terms are met. It will want to receive certain documents - for example shipping confirmation - as proof.

Why use a letter of credit?

Letters of credit are most commonly used when a buyer in one country purchases goods from a seller in another country. The seller may ask the buyer to provide a letter of credit to guarantee payment for the goods.

The main advantage of using a letter of credit is that it can give security to both the seller and the buyer.

Advantages for sellers

By asking for an appropriate letter of credit a seller is reassured that they will receive their money in full and on time. A letter of credit is one of the most secure methods of payment for exporters as long as they meet all the terms and conditions. The risk of non-payment is transferred from the seller to the bank (or banks).

Advantages for buyers

When a buyer uses a letter of credit they get a guarantee that the seller will honour their side of the deal and provide documentary proof of this.

Other things to consider

It’s important to be aware of the additional costs involved in using a letter of credit. Banks make charges for providing them, so it’s sensible to weigh up the costs against the security benefits.

If you’re an exporter you should be aware that you’ll only receive payment if you keep to the strict terms of the letter of credit. You’ll need to give documentary proof that you have supplied exactly what you contracted to supply. Using a letter of credit can sometimes cause delays and other administrative problems.

When to use a letter of credit

Although letters of credit can be useful, it’s often best to avoid using one for a transaction. They can sometimes result in expensive delays, bureaucracy and unexpected costs. As a general rule you should probably only consider opening a letter of credit as an importer if:

Your supplier insists on it

National exchange controls require it

Exporters - deciding whether to ask for a letter of credit

Think carefully about whether or not you need to ask an overseas customer for a letter of credit. Some important things to consider include:

Legal matters - does the country you’re exporting to require one?

Costs - does the value of the order justify the bank charges and extra costs involved, and who pays these costs?

The customer’s creditworthiness - do they have a track record with you?

Risks associated with the country you’re exporting to - is it politically stable with a good reputation as an international trading partner?

Normal trading practices - is it standard practice for exporters to use letters of credit when trading with that country, and/or in that particular commodity?

Available advice and guidance - banks may recommend using of a letter of credit in certain trading situations regardless of other factors, while credit insurers sometimes insist on it.

Give some thought to alternative arrangements, such as credit insurance, export factoring or cash in advance terms.

If you do decide that a letter of credit is the best option you’ll need to consider which type of letter to use. A ‘confirmed and irrevocable’ letter of credit is the most secure type.

It’s wise to have a clear policy in your business about when to consider using a letter of credit. Reviewing your policy on a regular basis will help you avoid using them unnecessarily and possibly putting off would-be customers.

Types of letter of credit

There are five commonly used types of letter of credit. Each has different features and some are more secure than others. The most common types are:

Irrevocable

Revocable

Unconfirmed

Confirmed

Transferable

Standby

Revolving

Back-to-back

Sometimes a letter of credit may combine two types, such as ‘confirmed’ and ‘irrevocable’.

Irrevocable and revocable letters of credit

A revocable letter of credit can be changed or cancelled by the bank that issued it at any time and for any reason.

An irrevocable letter of credit cannot be changed or cancelled unless everyone involved agrees. Irrevocable letters of credit provide more security than revocable ones.

Confirmed and unconfirmed letters of credit

When a buyer arranges a letter of credit they usually do so with their own bank, known as the issuing bank. The seller will usually want a bank in their country to check that the letter of credit is valid.

For extra security, the seller may require the letter of credit to be ‘confirmed’ by the bank that checks it. By confirming the letter of credit, the second bank agrees to guarantee payment even if the issuing bank fails to make it. So a confirmed letter of credit provides more security than an unconfirmed one.

Transferable letters of credit

A transferable letter of credit can be passed from one ‘beneficiary’ (person receiving payment) to others. They’re commonly used when intermediaries are involved in a transaction.

Standby letters of credit

A standby letter of credit is an assurance from a bank that a buyer is able to pay a seller. The seller doesn’t expect to have to draw on the letter of credit to get paid.

Revolving letters of credit

A single revolving letter of credit can cover several transactions between the same buyer and seller.

Back-to-back letters of credit

Back-to-back letters of credit may be used when an intermediary is involved but a transferable letter of credit is unsuitable.

Uniform customs and practice for documentary credit

To standardise terms and procedures and avoid misunderstandings, a set of international rules for letters of credit have been developed by the international chamber of commerce (ICC ).

Most commercial letters of credit are governed by these rules, which are referred to as uniform customs and practice for documentary credits (UCP ). The current version of the rules is UCP 600, which came into effect on 1 july 2007.

Using UCP 600 letters of credit

Be aware that in some instances the definitions and procedures set out in the UCP standards may differ from the laws of a particular country.

Trade credit advantages and disadvantages

Understanding trade credit advantages and disadvantages is crucial to helping you decide whether you should offer trade credit to customers or use trade credit when buying supplies for your business. Trade credit can be a lifeline for business cash flow, but there are plenty of trade credit pitfalls to know about.

What is trade credit?

Trade credit is where one business provides a line of credit to another business for buying goods and services. For example, a garden landscaping business might use trade credit to buy materials for a landscaping project, buying on credit and promising to pay within a set term – usually 30 days.

As a business, you can offer trade credit to other companies and also use trade credit facilities offered by other companies. Trade credit is less formal than a loan from a bank, though there are usually terms and conditions attached, including penalties and interest for late payments. Trade credit is a mutually beneficial arrangement – customers are able to buy goods on credit, and suppliers can attract more customers by not demanding cash up front.

Trade credit advantages and disadvantages are different depending on whether your business is the buyer in the agreement and using trade credit, or a supplier of trade credit. Before accepting trade credit, it’s best to know the positives and negatives of any agreement.

Advantages of trade credit for buyers

While there are some trade credit disadvantages for buyers, there are overwhelming more advantages for businesses looking to use trade credit to buy goods, materials and services without having to pay up front or on delivery. Benefits range from accessibility and cash flow advantages to helping new startup businesses get off the ground.

Help startup businesses get up-and-running – trade credit can be useful for new businesses unable to raise funding or secure business loans, yet need stock quickly. However small businesses can be hamstrung by a lack of trading history which makes obtaining trade credit difficult.

Get a competitive edge – buying goods as required on credit gives businesses a competitive advantage over rival firms that may have to pay upfront. Using trade credit allows your business to be more flexible, adapting to market demands and seasonal variations so that you have a constant supply of goods even when your finances aren’t stable.

No cash required upfront – with no need to pay cash up front, buyers can stock up in time for peak demand, such as placing bigger orders to take advantage of key seasonal selling times such as christmas. Trade credit is an advantage as cash flow may be low coming off quieter months, potentially preventing enough stock to be purchased for peak selling times.

Fuels business growth – think of trade credit as an interest-free loan. It’s one of the best ways to keep cash in your business, effectively providing access to working capital at no cost. There’s less administration compared to arranging a short-term loan. Instead, rather than using cash reserves on stock, your business is effectively selling goods on behalf of the supplier and getting a profit for doing so.

Easy to arrange – if your business has a good credit history, is able to meet a supplier’s requirements and has the ability to make regular payments then trade credit agreements are typically easy to arrange and maintain. There are few formal arrangements or negotiations to complete, making it quick-&-easy to use.

Increases your company’s reputation – demonstrating your business can make regular payments against credit is a good way of establishing and maintaining your company as a valuable customer. A good trade credit history can mean suppliers treat you as a preferred buyer.

Discounts and bulk buying – suppliers may offer appealing discounts to trade credit customers who pay early, making it a useful way to obtain a discount. Companies with a good trade credit history may be offered discounts, especially for bulk purchases, or exclusive access to goods and services.

Advantages of trade credit for sellers

For suppliers, trade credit is all about winning new customers, increasing sales and retaining customer loyalty.

Winning new buyers – buyers like trade credit. It’s an easy way to ease cash flow, which can help improve a small business’s profitability. As a supplier, offering trade credit is a useful tactic to win new customers – especially if competitors insist on payment upfront.

Sell more goods and services – suppliers can mix trade credit with bulk discounting to encourage buyers to spend more. If buyers quickly sell out of stock, they are more likely to return and buy additional stock to meet customer demand.

Improve buyer loyalty – supplier trade credit can prevent buyers from looking elsewhere and strengthens the supplier-buyer relationship. Trade credit relies on trust between the two parties, good communication, and a mutually-beneficial relationship that can reinforce loyalty.

Disadvantages of trade credit for buyers

While there are fewer downsides in terms of trade credit advantages and disadvantages for buyers than suppliers, there are still potential drawbacks that are worth understanding. Access to free credit can seem a lifeline for a cash-strapped business but if the fundamentals of your business mean you’re likely to miss repayments, you might want to think again about relying on trade credit.

Hard to obtain for startups – trade credit seems perfect for startups. Access to stock without upfront payment could help get your business up-and-running. However, trade credit is significantly harder for new businesses to obtain or it may be offered on restrictive repayment terms. Until your business has established itself and built up a consistent trading history, some suppliers will be reluctant to offer your business trade credit.

Penalties and interest – while trade credit is effectively ‘free money’ and can be repaid without interest, missing repayment deadlines can turn ‘free money’ into ‘expensive debt’. Most trade credit terms and conditions include penalties for late payments and interest payable on outstanding credit. This can quickly spiral into significant costs if your business doesn’t work to clear trade credit debts.

Legal action – fall behind on trade credit payments and your business could face legal action, including goods and assets being seized to pay outstanding bills.

Negative impact on credit rating – prompt repayments of credit is good for your business’s credit rating; missed deadlines and late payments can quickly harm your rating. That can have an impact when your business later seeks to raise finance such as obtaining a small business loan, as a poor credit rating can affect the amount of interest you’ll have to pay or even if you can secure a loan in the first place.

Loss of suppliers – when faced with a poor-paying buyer, suppliers may be tempted to cut their losses and refuse to work with your business. Suppliers can pull the plug on working with you, leaving your business unable to operate or meet customer demand – potentially resulting in the closure of your business.

Disadvantages of trade credit for suppliers

The bad news for suppliers is they tend to carry a larger part of the risk in the trade credit advantages and disadvantages equation. While there are lots of routes open to deal with problem buyers and getting back money your business is owned, these can be time-consuming and costly – potentially impacting your cash flow and causing financial problems.

Late payments – buyers paying late is the major problem suppliers face when offering trade credit. Depending on your industry, be prepared that most buyers will sometimes pay late. According to creditsafe, more invoices are paid late than on time.

Cash flow problems – late payments or buyers simply not paying at all can lead to serious cash flow problems for suppliers. With the need to pay their own outstanding bills, suppliers can be effectively caught between demands from creditors for payment and chasing after buyers for overdue cash. Ensure your business has a strong cash reserve and doesn’t overextend on credit. Offering discounts to buyers who make early repayments can also help alleviate cash flow problems caused by late payers.

Bad debt – late payments are one thing, but non-payment can present a serious challenge. Customers using trade credit may go out of business or payment may simply be too difficult to chase down, which means your business will need to write off the loss as a bad debt. It’s worth investigating trade credit insurance, which can insure your business for bad debt caused by defaults on trade credit agreements.

Customer assessment – offering trade credit is an act of trust. Assessing whether a customer has the means to repay you is worth doing right, but determining a buyer’s credit worthiness can be time-consuming. You’ll need to check references, obtain credit reports and review trading history – all of which takes time.

Account handling – offering trade credit involves a lot of paperwork and administration. As a supplier, you’ll need to get professional legal help to write terms and conditions, and you’ll need dedicated account handlers to ensure that outstanding invoices are chased up. Setting clear invoice terms and ensuring good communication can help encourage buyers to pay promptly and regularly. Investigate online accounts software with CRM and invoicing – they often include free alerts when invoices are due.

So, let's see, what we have: trade credit is a type of commercial financing in which a customer is allowed to purchase goods or services and pay the supplier at a later scheduled date. At trading on credit