Mutual Credit – Trade without Money

This is a brief introduction to the principles and core features of Mutual Credit. Although the subject of monetary theory can quickly become complex and technical, there is really no need for this – what matters is that it works, and in a simple and obvious way for those who use it – just as pounds and pence do.

A business using Mutual Credit simply uses a payment gateway to pay for an exchange – or receives payment. It’s just like using a banking or accounting app to process payments. Everything works as normal.

But of course, that brings up our first question:

If Mutual Credit is just like money, then why not use money? Practically, if you have no shortage of money, the probable answer is that you wouldn’t.

But when we talk to SMEs, we find that cashflow problems, cost of finance and general tightness of working capital are significant and recurring problems.

And that’s where Mutual Credit comes in. 

Simply, a group of businesses which trade with each other come together to form a Mutual Credit club, within which they each have access to free credit for trade with each other.

In the context of a group of businesses, all of them Members of a Mutual Credit club, each accepts payment from the others in Mutual Credit units as an alternative to hard cash. It’s a form of trade credit (the typical ‘thirty days to pay’ that we’re used to), except that in a Mutual Credit club, this agreement is not just between two parties, but among all the Members.

So, if you are paid in mutual credit units by one member, you can use those units to pay for supplies from any other member. The credit is free – just like trade credit – but you can spend it straight away.

For the trade which is effectively ‘circular’ within the club, no hard cash at all need change hands. If you buy to roughly the same value as you sell, within the club, there’s no balance to pay. You do pay, of course – but with the goods and services you provide, rather than with money.

If a business with a negative balance (they’ve bought more than they’ve sold) wants to leave the club, or ceases trading, then they need to settle up in cash.

Interest free credit with no time limit within the club: because every seller can immediately use the Mutual Credit units added to their account balance to buy from other members, time limits aren’t needed (credit limits are in place, of course).

Increased trade volume: because everyone in the club is a trusted member – all vetted before joining, all having signed up to the Member’s Agreement, there is reliable credit in the club – meaning your customers can afford to buy from you when they need to – and they’ll prefer to buy from you, as a member, than go elsewhere.

Reduced cost of finance: many small businesses struggle with cashflow and depend on overdrafts and other expensive forms of credit. The membership of a Mutual Credit club offer members interest free credit within safe limits. The more trade you do within the network, the less interest you pay to the bank.

Credit limits that suit your business: you decide how much trade credit you want to offer into the club (the maximum balance you want to hold), and the software allocates you a safe credit limit, based on a number of things – particularly your trading history. So you’re in control of how much credit you offer, and can increase the amount of credit the club will offer you on the basis of how much trade you do.