What Is a Trade Credit for Businesses?

What Is a Trade Credit for Businesses?


There’s never a good time for poor cash flow — especially if you need to replace equipment or replenish your inventory. But don’t put your purchase plans on hold just yet — you might be able to get what you need through a trade credit.

What Is a Trade Credit?

A trade credit lets a buyer obtain goods or services on credit and pay for them later. It’s sometimes called a supplier’s credit, supplier financing or a mercantile credit.

Unlike a credit card purchase or a traditional business loan, which charges interest as a borrowing cost, a trade credit is a business-to-business transaction that requires little or no interest payment, business.org explains.

How Does a Trade Credit Work?

To a degree, the terms of a trade credit depend on the supplier offering it. Suppliers determine the amount of the bill, how much time the buyer has to pay it and what discount, if any, the supplier offers as an incentive for early payment. The most common payment term is 30 days from receipt of the invoice, which the seller provides upon delivering the goods or services.

Male warehouse manager adding stock inventory data in digital tablet in warehouse wearing a white hardhat and safety vest standing

What if You Can’t Pay Back a Trade Credit?

Most suppliers charge a late penalty, usually a percentage of the original cost, when buyers don’t pay on time. They’ll also withdraw any discount offer. What’s more, the supplier could report late payments and defaults to the credit bureaus, which could hinder the business owner’s ability to borrow money in the future.

What is a trade credit worth to your business? That depends on whether you need one to keep your business operations flowing when your cash is not. Just be sure that you understand the terms and consequences of any deal before you agree to one.