Retail credit is a broad term that refers to different types of credit facilities issued by lenders or companies to customers to spend on purchases.
This enables customers that has gained a certain level of trust to make purchases on credit.
The granting of retail credit is a practice used in various levels of business and across various industries.
Retailer to consumer
To encourage customers to spend more on their products, retailers often issue credit to loyal customers to those who have shown a track record of consistent purchases.
Sometimes customers want to spend more money on a brand they love but are unable to due to budget constraints.
Sometimes a product they really want to buy is too expensive for them to purchase outright.
Retailers can then issue retail credit to these customers who have demonstrated credibility so that they can purchase what they like and make payments later.
This is most most often done by partnering with credit card companies to issue special credit cards just for customers of a particular retail store.
These cards often come with rewards programs to encourage customer to spend even more. Those who wish to maximize their rewards can often choose to buy products from a specific retailer even though they could get them from a competitor in a more convenient location.
Some retailers even work with lenders for special arrangements to provide financing for their customers to purchase products from them.
Otherwise, customers might not be able to purchase their products. This is especially with big ticket items.
Car dealers for example, often provide financing for their customers. These financing arrangements are often provided for by special agreements between lenders and dealers.
Retailers offering retail credit to consumers can also be frequently observed with furniture retailers. They offer customers the option to purchase furniture on credit and only require buyers to make a monthly installment payment for a specified number of months.
This enables customers to make purchases they would otherwise not be able to.
Supplier to retailer
For retailers that imports finished goods from third party suppliers, they often receive retail credit or credit terms so that they can purchase stock, sell the inventory, and pay the suppliers later.
This allows retailers to order more stock rather than being limited by the cash they have on hand.
Suppliers who have long term working relationships with retailers can often provide a very large credit line to purchase merchandise from them for resale. This is on top of the repayment period which might be as long as 180 days.
This means that a retailers can purchase as much stock from a vendor as possible up to a certain credit limit, and make payment as long as 180 days later.
This essentially means that the buyer of inventory is getting free financing for the goods ordered… and might not even have to pay an interest on it.
The terms of such retail credit arrangements are negotiated between the parties involved.
These types of financing arrangement can be made between any types of businesses as long as the parties trust each other.
Lender to business
For trading businesses involved in the import and/or export of products, banks often provide credit facilities such as trade lines to assist them in doing business.
These facilities can sometimes play a primary role in the operations of a business.
For example, letters of credit can be a critical requirement for suppliers to send products to another country. This is to be sure that the goods they ship would eventually be paid for.
Trade lines also allow retailers to obtain credit lines to purchase more stock that they could if they were to use cash.
The drawback of these facilities is that they often come with a host of service fees on top of the interest charges that a business has to pay for when using them.