Definition of Trade Debts

Trade debts include all those payments that the purchaser is allowed to make at a later date. Thus, a trade debt is originated as a credit facility for increasing the sales revenue for a business. Trade debts for a company are of two kinds: trade receivables and trade payable.



The accounts receivables include the amount of money that is yet to be recovered from the purchasers or users of a companys services. The accounts payable include the amount that your company owes to others against a purchase that's been made or a service that's been utilized for business operations.

Facilitate Business Activity

Trade debts facilitate business activities through permitting purchasers pay at a later date. This facilitates a purchaser to make or sell the end product, generate revenue on the product, keep the value added or the profits, and return the trade debt according to the predetermined time.

Are Trade Debts Important?

Trade debts not only facilitate the business operations and sales of a business but can serve other purposes at the same time. A popular use of trade debts is to include them into financial statements of the companies. The trade receivables, also known as accounts receivables, are recorded as current assets on the balance sheet, while the trade payable, also known as accounts payable, are recorded as current liabilities.

Trade receivables are assets and can be pledged with a financial institution or a bank to obtain a credit line or a loan. Thus, trade debts can help generate business activity and at the same time provide a means to obtain cash for operating activities.

Short-Term Nature of Trade Debts

The primary purpose of allowing trade debts is to save the interest payments, if the money to purchase those products or services was borrowed from a bank. Also, trade debts are usually synchronized with the trade cycle of a firm and are of a short-term nature. Businesses producing daily use products such as soaps will allow a trade debt ranging from a few days to a few weeks incorporating the time it may take for a shop to sell the soap. A car manufacturer may offer a trade debt, for a length of three to six months depending on the time it takes to sell cars on average.

Associated Problems with Trade Debts

It is not always simple to determine the amount of trade debts a firm holds. This can be a loophole for firms to cheat their auditors through generating fake invoices and trade receivables. Also, it is often hard to determine if the trade debts are in good standing and will actually be received by the company, or if they will go into default. The company auditors must be cautious in verifying changes in the levels of trade debt if they are striking and appear to be manipulative.

Competitive Pressures

Trade debts also are created due to competitive pressures in certain industries. In such cases a company may offer more relaxed credit terms or longer periods for payment of trade debts to capture more of the market share.