Trade Credit - What is It and Should Businesses Use It?

April 1, 2022

What is Trade Credit?

Trade credit allows Buyers to buy goods and services and pay for them later. It's a short-term finance option that allows Buyers to grow their businesses without having to fund that expansion from their own capital.

Research suggests that 55% of all B2B sales in Western Europe are funded using trade credit services, with Buyers reporting improved cash flow and better relationships with Suppliers.  


How Does Trade Credit Work?

Trade credit is agreed upon between a Supplier and a Buyer. The Supplier accepts deferred payment terms - usually between 30 and 120 days - for products delivered to the Buyer there and then. 

This means that Buyers can receive goods without needing liquid capital for their purchase. By providing such credit, Suppliers can build positive relationships with Buyers and can often increase sales volumes by allowing Buyers to 'buy now and pay later'.


Trade Credit Example

ABC Buyer Ltd needs goods from XYZ Supplier Ltd to fulfil orders for its own customers but doesn't currently have the capital required to make the purchase. 

XYZ Supplier offers the goods to ABC Buyer via trade credit, allowing 90 days for payment.

ABC Buyer receives the products and fulfils its own customer orders. It then uses the revenue generated from these sales to pay its invoice to XYZ Supplier within the agreed 90-day period. 


What is a Trade Credit Period?

Trade credit periods are pre-agreed by both the Buyer and Supplier. Typically, a Supplier gives the Buyer anywhere between 30 and 120 days to pay for the goods.

Trade credit terms can vary by industry, with Suppliers sometimes offering extended payment terms (possibly exceeding 120 days) for high-value goods. 

At the same time, many Suppliers offer early payment discounts. For example, a Supplier could offer a 2% discount if a Buyer pays within the first 10 days of a 30-day invoice payment term.


Risks of Trade Credit

Trade credit is effectively a short-term, unsecured, zero-interest finance agreement, so there are no direct costs of a trade credit agreement.

However, if payments are missed or not paid in full, there will be various financial and non-financial implications. These can include:

  • Late payment charges - These charges can negatively affect Buyers already struggling to pay debts on time.
  • Cost of negative working capital - Trade credit can put Buyers in a difficult cash flow situation if they don't pay.
  • Credit score - Buyers that don't pay invoices risk damaging their credit score which can affect their ability to apply for financial help in the future.
  • Reputational damage - Buyers that fail to make payments risk damaging relationships with their Suppliers.

Advantages of Trade Credit

  • Buyers don't need upfront cash to make purchases.
  • It helps Suppliers build relationships with Buyers.
  • The process is typically quick and convenient with only a single application form.
  • No financial collateral is needed.
  • It is an affordable, zero-interest finance agreement.


Disadvantages of Trade Credit

  • There is a high financial risk to the Supplier if the Buyer does not pay (see Trade Credit Insurance below).
  • It can limit cash flow for Suppliers, especially those with no available bank credit.
  • Penalties can be issued for late or non-repayment.
  • Non-repayment can negatively impact a Buyer's credit rating.
  • It can cause accounting complications because public companies must publish their financial figures on the transaction date. So, trade credit agreements can skew short-term records because assets are released without payment being received on the same day.

Trade Credit Insurance

Trade credit insurance provides security for Suppliers that offer deferred payment terms. With trade credit insurance, Suppliers will be protected if the Buyer does not pay, giving them peace of mind that their cash flow won't be affected.


Alternatives to Trade Credit

Trade credit agreements are not the only type of financial assistance available to Buyers and Suppliers trading internationally. 

  • Invoice factoring - Suppliers that don't want to risk their own funds when extending credit to Buyers can seek invoice factoring (also known as invoice financing) services. This allows a Supplier to offer generous deferred payment terms to a Buyer yet still receive a large advance payment from the factoring company. The balance - minus a service fee - is paid by the factoring company when the Buyer settles the invoice up to 120 days later. In the case of non-recourse factoring, the factoring company takes the risk of the Buyer failing to pay, so trade credit insurance becomes unnecessary.
  • Business lines of credit - BLCs are small business loans that provide Buyers with ongoing access to credit to pay bills and make purchases. This is not the same as trade credit because the line of credit is continual and the Buyer pays interest only on credit used. BLCs are usually given by banks.
  • Bank loans - Buyers might be able to qualify for a loan to pay for goods or services and then pay that money back. However, Buyers pay interest on borrowed funds and those rates may be higher for small- or medium-sized companies with short or no credit history.

Should Your Company Consider Trade Credit?

Companies are always advised to consider the pros and cons of trade credit and decide whether it suits their needs.

If you are interested in learning more about invoice factoring, Stenn has a dedicated FAQ section where you can find more information about our invoice financing services. We also provide videos which explain the company and the financing process in detail.


About the Authors

This article is authored by the Stenn research team and is part of our educational series.

Stenn is the largest and fastest-growing online platform for financing small and medium-sized businesses engaged in international trade. It is based in London, provides financing services in 74 countries and is backed by financial giants like HSBC, Barclays, Natixis and many others.

Stenn provides liquid cash to SMEs within the global financial system. On you can apply online for financing and trade credit protection from $10 000 to $10 million (USD). Only two documents are required. No collateral is needed and funds are transferred within 48 hours of approval.

Check the financing limit available on your deal or go straight to Stenn's easy online application form.


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Disclaimer: The above article has been prepared on the basis of Stenn's understanding of the subject. It is for information only and doesn't constitute advice or recommendation. Whilst every care has been taken in preparing this article, we cannot guarantee that inaccuracies will not occur. Stenn International Ltd. will not be held responsible for any loss, damage or inconvenience caused as a result of anything published above. All those applying for credit should seek professional advice when doing so.