Finances and Taxes

What is Trade Credit and How Can it Help My Business?

Nicole Rothstein  

Trade credit at a glance: A type of commercial financing, trade credit is an arrangement that allows businesses to purchase goods or services from suppliers on credit, which is paid back within a specified timeframe. 

Trade credit is basically a loan that a supplier extends to a buyer; it’s also a critical resource for many successful businesses. In this business-to-business exchange, the supplier allows the buyer to acquire goods and services on credit—delaying immediate cash payment. 

This buy-now-pay-later, short-term financing option is common in the B2B sector—particularly in the wholesale and manufacturing industries. But while, according to the World Trade Organization, 80-90% of global trade depends on trade finance, it’s also a common practice small businesses rely on for financial growth. In fact, sometimes it’s the only available source of financing for small businesses and startups. 

Even if trade credit agreements aren’t a major factor in your business processes, it’s likely that they are for other businesses in your supply chain—and therefore still a relevant topic for you. Let’s take a deeper dive into trade credit.

Trade credit terms, conditions, and calculations

While trade credit is typically more informal than a traditional loan, that doesn’t mean that it comes without specific term agreements. Suppliers commonly specify that payment is due within 30, 60, 90, or 120 days, but they can also customize loan terms based on cash flow or other factors to best help customers sell their product. It’s also common for sellers to offer discounts when payments are made ahead of the due date—a major advantage of using trade credit.

Let’s take a look at an example:

A new small business, Cathy’s Cleaners, needs cleaning products before beginning to book appointments. Cathy finds a supplier willing to sell her products on credit, amounting to $8,000. The sale is granted under the terms of 3/10 net 60.


According to these terms, the seller is extending an $8,000 trade credit to Cathy’s Cleaners for 60 days from the date the invoice is issued. If Cathy can make the payment to the supplier within 10 days of that date, she will receive a 3% cash discount. In this case, the discount is $240 and Cathy is required to pay $7,760.
But what happens if Cathy lacks the cash flow to pay back the trade credit in 10 days? If Cathy doesn’t take the discount, the trade credit amount is due in 60 days to the seller. 


The following equation calculates what it will cost Cathy to forgo the discount:
discount % ÷ (1 – discount %) x [365 / (full allowed payment days – discount days)]
Here is how it breaks down for Cathy using the terms 3/10 net 60:

3% ÷ (1 – 3%) x [365 / (60 – 10)].03 ÷ .97  = .0309 and 365 / 50 = 7.3.0309 x 7.3 = .2258 (so the real annual interest rate charged is 22.58%.)


Using these terms, 22.58% is the cost of not taking the discount. As a general rule of thumb, if you don’t have the cash flow to take the discount on trade credit, you might be better off to find a cheaper form of financing if possible.

Trade credit pros and cons

If you think your company could benefit from incorporating trade credit into your business processes, you might be debating the pros and cons.

The charts below show some of the benefits of trade credit, as well as appropriate times to use caution when considering buying or selling goods and services on credit.

Pros of trade credit for buyersCons of trade credit for buyers
Increases purchasing powerCan be hard to obtain for new businesses without a positive track record
Hard for startups/small businesses to secure other types of fundingHigh penalties may be issued on late payments
Improves cash flowThere may be temptation to commit to larger purchases than you have need for or the ability to pay back
Ideal for seasonal businesses (i.e. landscapers)Late penalties could have a negative impact on credit rating
Helps develop relationships and enhances credibility with suppliersLate payments could jeopardize relationships with sellers
Paying on time can boost creditCheaper options or ones that better fit your particular situation are possible
Provides a competitive advantage over rivals
Application process is usually quick and easy
Includes discounts, bulk buying opportunities
Keeps inventory high, customers happy 
Pros of trade credit for sellersCons of trade credit for sellers
Increases sale volumesLate payments can cause decreased cash flow
Improves partner relationships, increases customer loyaltyBad debts can result in loss
Attracts more customersStaff can feel the strain of added responsibilities (vetting buyers, keeping track of payments, etc)
Provides a competitive advantage over rivals

To use or not to use a trade credit manager 

If you’ve decided to leverage the benefits of trade credit, congrats! The next step is to consider whether or not to manage the credit yourself or employ a trade credit manager. An obvious cost to hiring another person to manage your trade credit is, well, the cost.

But there are several reasons to consider employing a manager, despite cost. For starters, your job is to run your business, not to stay on top of laws, policies, and procedures concerning trade credit. That’s where a trade credit manager comes in. They can negotiate terms on your behalf, maintain your trade credit portfolios, and reduce risk by ensuring timely payments. Overall, it’s possible that employing a trade credit manager can save you both time and money.

How to get started buying on credit

You’re ready to do this, but how? If you’re a buyer, the first step is to shop for a vendor—meeting with several suppliers to discuss terms and conditions. If you discover that larger companies are hesitant to sell to your small business on credit, consider finding another small business that is willing to do so.

Once you identify a supplier, you will need to complete their application—whether it’s a formal process or something more informal—and then wait for them to assess your business, your credit, and any references provided. Next comes the negotiation of trade credit terms, hopefully resulting in a finalized agreement.

How to get even more from trade credit

As a buyer, you can take certain steps to extend the advantages of trade credit, such as:

  • Working with multiple vendors—In Cathy’s case, she can approach one vendor for cleaning products, another vendor for cleaning cloths, and yet another for scrub brushes. Instead of $8,000 in trade credit from one supplier, maybe she now has $24,000 from all three.
  • Ensuring a clear understanding of all agreements—Written agreements with terms and expectations that are clear, concise and that encourage communication between all parties will reduce confusion and allow you to maximize your trade credit.
  • Extending loan terms—Instead of 30 days, is the vendor willing to give you 45? There may also be other ways you can adjust the terms in your favor, such as working out flexible payments schedules.
  • Cultivating relationships with vendors—Checking in regularly with your suppliers and getting to know them (and letting them get to know you) can build relationships that lead to loyalty.
  • Improving credit—Make a commitment to consistently pay your suppliers early. Then, consider working only with vendors who report back to business credit bureaus so that this commitment is reflected in your credit score.

Trade credit best practices

At the risk of sounding like a broken record…a positive payment history is key to successful trade credit relationships and outcomes. To help with this, find a method for keeping track of your credit, due dates, and payments that works for you. 

Other best practices include using caution when choosing order quantities, committing yourself to credit amounts you are confident you can repay on time, and keeping a close eye on your credit reports.

A final word on trade credit

As a business owner, trade credit can be your ace-in-the-hole—giving you a leg up on the competition. This popular form of commercial financing can be advantageous for your business, especially if it is a startup, operates seasonally, or if you have trouble securing other sources of financing. Trade credit can free up cash flow by allowing you to obtain the goods and services you need for your operations, without needing immediate payment, and it can also help you avoid other fees associated with traditional loans. When used responsibly and making timely payments, trade credit can be an effective financial tool that helps your business to grow and thrive.

Updated: March 2, 2022

Nicole Rothstein
Nicole Rothstein Nicole Rothstein covers a variety of topics related to finance, small business advocacy, and workforce and regional development. In addition to writing for and managing several blogs and publications, she has worked closely with federations, chambers of commerce, nonprofits, small businesses and financial institutions to create impactful content marketing strategies.
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