Trade debtors are clients who are extended credit privileges on purchase, but who have not yet settled those outstanding balances in full. Those balances comprise the accounts receivables of the supplier or vendor, and are tracked on a continuing basis. Depending on the terms of the purchase agreements between the supplier and each of the trade debtors, interest or finance charges may be applied to unpaid balances that roll over from one billing period to the next.
Extending credit privileges is a strategy that can benefit both suppliers and trade debtors. Customers have the ability to make essential purchases and leverage the debt so that it is retired over an extended period of time, based on the terms and conditions that apply to the credit agreement. At the same time, the supplier is able to generate sales that ultimately result in revenue for the company, allowing the operation to realize a profit. As customers remit payments on the outstanding balances, the company enjoys a cash flow that allows it to pay for the costs of operation and continue to produce more goods and services that are sold to the customer base.
Tracking the payment activity of trade debtors is important to the task of keeping the company financially solvent. Most companies will set standards for the payment of outstanding invoices or purchases. Depending on the structure of the credit agreement, customers may be required to remit payment for each invoice within a certain number of calendar days, or be assessed some type of additional finance charge or late fee. With a revolving credit arrangement, the customer must pay a minimum amount each billing period in order to keep the customer account in good standing. Some companies will even offer incentives such as small discounts on their next purchases if the invoices are settled within the specified time frame.
When trade debtors begin to exhibit a payment history that includes continuous late payments, the provider may take steps to limit future purchases, at least until the current account balances are retired in full. This is particularly true if the supplier has reason to believe that the debtor is about to undergo significant financial difficulty, up to and including bankruptcy. In order to determine if there is reason for concern, the supplier may investigate the debtor by pulling credit reports and consulting other business sources. This type of action is necessary in order to protect the interests of the supplier and prevent defaults that could create significant cash flow issues for the business.