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.
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’.
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.
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.
Trade credit is effectively a short-term, unsecured, zero-interest finance agreement, so there are no direct costs of a trade credit agreement.
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.
Trade credit agreements are not the only type of financial assistance available to Buyers and Suppliers trading internationally.
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 stenn.com 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.
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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.