Factoring Companies Guidebook
Trade Credits/Barter
Definition
What are sometimes referred to as 'Trade Credits', amount to a form of barter, where a company accepts these trade credits in lieu of all or part of the normal monetary settlement of goods or services. These trade credits can then be used in exchange for goods or services at an agreed rate of exchange.
Concerns
From the perspective of the accepting company or recipient of these trade credits, their success depends on how widespread is the scheme and the number of other participating concerns. In reality these schemes are not widely spread and the trade credits are not easily realisable, so tending to sit on the recipients Balance Sheet until written off by their auditors. This therefore reduces the participant's margins and profitability.
If a Client were to accept these trade credits in lieu of cash or the normal monetary remittance, our security is eroded as we will not receive full value for the prepayment we have made.
Identification
Review the Client's invoices for any reference to trade credits, amounts or products in lieu of full payment by the customer.
Review the Client's current assets in its Balance Sheet for any such items.
Treatment
Invoices and customers subject to such arrangements should be excluded from the Agreement or a reserve put in place to cover our position.
Clients sometimes enter into such arrangements to accept Trade Credits from its customers as a goodwill gesture to retain its custom, in order that the credits are removed from the customers' Balance Sheet. Where this is done, by retaining the original cash value of the invoice, but increasing the overall value by the amount of the trade credits, we may decide to accept assignment and fund to the limit of the monetary value. The monetary value of the invoice must be clearly stated by the Client on assignment. Once payment is received there will be no effect on our ledger but the amount of the trade credits will usually be written off as settlement discount on the Client's ledger.