Trade payables can be simply defined as monies owed by a business to its suppliers. When a business operates, it must spend money to provide the goods or services it sells. To purchase the necessary raw materials, the business opens credit lines with its suppliers that are usually due at the end of the business cycle, or 30 days. These debts are also known as accounts payable.
Accounts payable is on a company’s balance sheet as a short-term liability, although it is normally separated from other short-term debt and placed on its own. When a potential lender reviews the company’s financial statements, it pays particular attention to the relationship between what is owed to suppliers and the amount of cash on hand.
Supplier accounts generally get paid first, because without raw materials, the business fails. If the accounts payable line is greater than or equal to than the cash-on-hand line in the assets section of the balance sheet, the company will not be able to pay its other obligations.
Payables and Lenders
A potential lender will look at the relationship between accounts payable and other aspects of the balance sheet to determine the financial health of the company before approving a loan.
Trade payables work much like a credit report for a company. Since they are generally due monthly, the standard "current," "30 days late," "60 days late," etc. model applies. The more quickly a company pays its supplier accounts, the better its “credit report” looks to a lender.
Why Have Trade Payables?
Trade payables are a necessary evil for most businesses. During a normal business cycle, income is not generated until the end, forcing the business to obtain the raw materials with either a personal investment by the principal(s) or on credit. Most choose credit in order to preserve capital. This improves the cash line and frees cash for other costs associated with producing the goods.
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