Trade Credit - What Is It and Should You Use It?

April 1, 2022

What is trade credit?

Trade credit is an agreement between businesses to delay payment for goods supplied. It’s a short-term financing option that allows a buyer to access goods and services without needing immediate liquid capital to pay for them.

It is a zero-interest financing option that allows buyers to fund the costs of needed goods while focusing on short-term growth.

Research suggests that 55% of all B2B sales in Western Europe are funded using trade credit services, with businesses reaping the dual rewards of better cash flow and improved relationships.  


How does trade credit work?

Trade credit is agreed between two businesses. The supplier agrees to accept deferred payment for products or services that are delivered immediately to the buyer. Trade credit agreements typically involve payment terms of 30 to 120 days.

The agreement benefits both parties. Buyers can access goods and services without needing liquid capital, while sellers are able to nurture positive relationships with their buyers and can often increase sales volumes because the buyer isn’t limited by needing immediate cash to fund the purchase.

For example:

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

XYZ Supplier offers trade credit to ABC Buyer, 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 agreed upon between the buying and selling companies.They are commonly 30, 60 or 90 days and may even increase to 120 days or more.

Credit periods can vary by industry, with those offering high-value goods often extending payment dates. For example, goldsmiths may offer up to 120- or 240-day credit periods for valuable goods.

Many suppliers may offer ‘early payment’ discounts. For example, a supplier may offer credit terms of ‘2/10 net 30’. This means the total credit period is 30 days – with buyers required to pay within this window – but the buyer will receive a 2% discount if it pays within the first 10 days.  


Cost of trade credit

Trade credit is effectively a zero-interest finance agreement, so there are no direct costs associated with a standard agreement.

However, there are various indirect costs, especially if payments are missed or not paid in full.

These may include charges associated with late payment if these are written into the initial agreement, and this can have a significant negative impact on businesses already struggling to pay debts on time.

There may also be non-financial costs, such as damage to reputation. Buyers who fail to make repayments not only risk damaging relationships with vendors but will also feel the effects in their credit ratings – meaning they will be unlikely to qualify for financial support in the future.

For sellers, there is a risk that trade credit agreements may put them into a negative working capital position. However, negative working capital is natural in many industries and isn’t always detrimental if businesses accurately account for delayed payments.

For more information on working capital, check out our dedicated guide.


Credit insurance

Trade credit insurance provides non-repayment protection for suppliers offering deferred payment terms, giving them peace of mind that their own working capital won’t be affected if the buyer is unable to pay. 

Credit insurance providers help suppliers review potential buyers before entering into any agreements, making sure their financial history is strong enough to meet the credit terms. They can also help to calculate credit limits for each customer. 

The cost of trade credit insurance is another indirect cost of suppliers offering trade credit to their buyers. An alternative is ‘non-recourse’ invoice financing, which also provides protection against non-payment and typically provides a much faster pay-out than credit insurance.


What are the advantages and disadvantages of trade credit?


  • Buyers don’t need immediate liquid capital.
  • Helps suppliers build relationships with buyers.
  • Typically quick and convenient with only a single application form.
  • No financial collateral needed.
  • Affordable, zero-interest finance agreement.


  • Financial risk to the supplier if the buyer is unable to pay.
  • Can limit cash flow for suppliers, especially for those who have no available bank credit.
  • Penalties associated with late or non-repayment.
  • Non-repayment can negatively impact a buyer's credit rating.
  • Can cause complications with accounting because public companies are required to publish their financial figures on the transaction date. So, trade credit agreements can skew their records short-term, as assets are released but payment is not received on the same day.

Alternatives to trade credit

Invoice factoring

Invoice factoring (invoice financing) is a strong alternative in new trade negotiations where supplier and buyer have no past relationship and the supplier is wary of extending credit.

In this arrangement, the supplier can trade with the buyer on deferred terms and then ‘sell’ its invoice to a factoring company for immediate payment of up to 90% of its value. The balance - less the factor’s fee - will then be paid to the supplier when the buyer settles the invoice with the factoring company 30, 60, 90 or even 120 days later.

This means the factoring company takes on the responsibility for chasing late payments and, in ‘non-recourse factoring’, takes the financial loss if the buyer never pays. Unlike trade credit insurance, if the buyer defaults there are no claims to be made and no extensive waits for insurance payouts because the risk has all been shifted to the factor. Invoice financing is often used to control cash flow by suppliers who are not eligible for bank loans or lines of credit.

For more information on invoice factoring services and how they can work for your business, check out Stenn’s dedicated guide or speak to our friendly team today.

Business line of credit

A business line of credit is a type of small business loan that offers ongoing access to credit.

The key difference to trade credit is that buyers accessing a line of credit are effectively borrowing money, rather than simply delaying payment. As a result, the buyer pays interest on any credit it uses.

Bank loan

Buyers may be able to qualify for a loan to pay for goods and services in the short term, which they then pay back in a similar way to a trade credit agreement.

However, similar to a business line of credit, businesses pay interest on any funds they borrow through a bank loan. Furthermore, small businesses in developing or emerging markets often have limited access to bank loans and those that do may suffer high charges.


Should your business consider trade credit?

Businesses are advised to weigh up the pros and cons of trade credit and consider different types of financial services to find a product that works for them.


About the author

Stenn is a registered member of the ITFA, IFA and WOA. It has financed invoices worth over $7 billion (USD) to date and provides:

  • An online platform for easy applications.
  • Non-recourse factoring (i.e. full protection against non-payment of invoices).
  • Rapid assessments (usually within 15 minutes).
  • Cash advances within 48 hours, with only two documents to sign.
  • Advances of between $10K (USD) to $10M (USD).
  • Fees that begin at 0.65%.
  • Advances on international deals that other companies and banks can’t, or won’t, finance.
  • Services in 74 countries.
  • Reverse factoring (buyers can use Stenn to pay immediately and settle the invoice later with us).
This article is authored by the Stenn research team and is part of our educational series.
© 2022 Stenn International Ltd. All rights reserved. Any redistribution or reproduction of part or all of the contents in any form is prohibited other than the following:
  • You may copy the content to your website page but only if you acknowledge this website as the source of the material and provide a back link to this article.
  • You may not, except with our express written permission, distribute or commercially exploit the content in any other way.

Disclaimer: The above article has been prepared on the basis of Stenn’s understanding of current invoice factoring. 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.


Discover our other guides

To find out more about alternative types of business finance, check out our other informational guides.

Alternatively, speak to our team of financing experts for more information on how Stenn can support you with your unpaid invoices.