What is trade credit and how does it work?

Managing cash flow can be tricky, particularly when you’re reliant on receiving customers payments to cover the cost of paying suppliers. Trade credit can help bridge the gap, providing the cash to pay suppliers before you receive payment from your customers.

Unlike a business loan, trade credit doesn’t require collateral or a lengthy application. And because it’s based on trust between you and your supplier, it��s often interest-free.

In this article, we’ll explain what trade credit is, how it works, the different types of trade credit available, the advantages and disadvantages of using it, specialist trade credit insurance, and more.

In a nutshell: Trade credit is a common form of short-term finance for businesses that need to pay suppliers before receiving payment from customers. There’s no formal application, just a direct agreement with your supplier. While it can be an effective way to manage cash flow, there are some potential risks involved, including penalty charges or damage to your credit score if you don’t pay your supplier on time.

What is trade credit in business?

Trade credit is a simple way for businesses to buy what they need now and pay for it later. It’s a type of short-term finance where suppliers provide their goods or services today and let you settle the bill in 30, 60, or 90 days. And if you pay on time, it’s often interest-free.

If your business regularly pays suppliers before your customers pay you, trade credit can help bridge that gap and support your working capital cycle.

How does trade credit work?

Trade credit is one of the most accessible ways for businesses to free up cash flow. In fact, it’s so common that it accounts for around 49% of all B2B sales in the UK.

The way it works is very simple:

You order goods or services without having to pay anything upfront

Your supplier delivers your order and issues an invoice with a due date

You pay the invoice by the agreed date

For example, a retail store might use trade credit to stock up on inventory before the busy holiday season, then pay their supplier after they’ve sold the products to their customers.

If you don’t pay an invoice in time, the supplier may charge you interest, depending on the terms of your agreement. To stay on top of invoices and deadlines, consider using accounting software.

How is trade credit different from Buy Now Pay Later?

Trade credit and Buy Now Pay Later (BNPL) both let you delay payments, but they work differently.

Trade credit is a direct agreement between your business and a supplier, with flexible terms and no third-party involvement

BNPL involves a third-party lender who pays the supplier upfront, and you repay the lender later, typically in fixed instalments

What are the different types of trade credit?

Type of trade credit	How it works	Who it’s for
Open account credit	The supplier sends the goods or services first, then invoices you. You pay later, usually in 30, 60, or 90 days.	Businesses with an established supplier relationship and fairly predictable cash flow.
Promissory note credit	You sign a written promise to pay the supplier by a set date. It’s more formal than open account credit and may be used when the supplier wants extra reassurance.	Businesses that need a more formal arrangement, especially for larger orders or newer supplier relationships.
Trade acceptance / bills payable	You formally agree to pay a bill at a later date. This makes the debt more structured and documented than an open account.	Businesses that need a more formal credit arrangement, often in larger or more complex transactions.
Installment credit	You pay in regular chunks over an agreed period, rather than in one lump sum.	Businesses buying expensive equipment or making a large purchase that they want to pay over time.
Revolving credit	You get a credit limit and can keep buying up to that limit. As you repay what you owe, that credit becomes available again.	Businesses that regularly buy from the same supplier and need flexible ongoing credit.
Consignment credit	The supplier gives you stock, but you only pay for the items once you sell them. Unsold stock usually remains the supplier’s property.	Retailers or resellers that want to test products or avoid paying upfront for inventory.
Business-to-business BNPL	A third-party provider lets you buy from a supplier now and pay later, often in fixed instalments or after a short deferral period.	Businesses that want fast approval and simpler payment terms, particularly for smaller purchases.

Who uses trade credit?

Trade credit is extremely common and is used across almost every industry where businesses buy from other businesses.

For example:

A construction business faces high upfront costs for materials and equipment, so they buy timber, paint, and tools on trade credit, complete the job, receive payment from the client, and then settle the supplier invoice.

A retail business needs to stock large amounts of inventory before a seasonal peak but doesn’t have the cash to pay suppliers upfront, so they use trade credit to buy stock and packaging, sell products to customers, and pay suppliers once cash comes in.

A manufacturing business deals with long production cycles and high raw material costs, so they buy raw materials on credit, produce goods over weeks or months, sell to wholesalers or distributors, and pay suppliers after receiving revenue.

A food and hospitality business needs fresh supplies constantly, so they get fresh ingredients delivered weekly on credit, use them to generate daily revenue, and pay suppliers at the end of the week or month.

An automotive business manages complex supply chains and expensive parts, so they order components and tools on credit, provide services or sell products to customers, and pay suppliers once the cash comes in.

Trade credit advantages and disadvantages

Buyer benefits

Improves cash flow by letting you buy now and pay later

Offers interest-free finance if you pay on time

Provides operational flexibility to handle seasonal demand spikes

Simplifies admin by processing one monthly invoice instead of paying every time you order

Builds credit history when used responsibly, strengthening your business credit score

Strengthens supplier relationships which could lead to better terms in the future

Buyer risks

Your credit rating could fall if you make late payments

You could overcommit if revenue drops unexpectedly and you can’t pay bills

Suppliers might cut you off if you repeatedly pay late

Cash flow problems could arise if growing debt leads to insolvency

You might forfeit discounts if you miss early payment deadlines

Seller benefits

Increases sales by encouraging larger orders and repeat business

Boosts customer loyalty, turning occasional buyers into long-term partners

Provides a competitive advantage by attracting customers who need short-term finance

Streamlines processes with fewer invoices to manage

Seller risks

Clients could miss payments, leading to losses and cash flow problems

Cash flow could be strained, requiring a line of credit or overdraft to cover gaps

Increased fraud risk if buyers are unethical or fraudulent

How do you apply for trade credit?

Applying for trade credit is typically more straightforward than applying for traditional business finance, since it’s based on trust and your relationship with the supplier.

If you apply for open account credit, which is the most common type of trade credit, you may not have to complete a formal application. But you’ll typically need to provide some details and sign an agreement to the supplier’s terms.

Your supplier will likely ask for the following:

Business details, such as your company registration number, address, and contact info

Financial records, such as recent bank statements, profit and loss accounts, and balance sheets

Trade references from other suppliers who can vouch for your payment history

Your credit check authorisation, allowing your supplier to perform a business credit check

If your business doesn’t have a trading history, you may need to:

Provide a business plan showing your growth potential

Use your personal credit history to demonstrate reliability

Offer upfront payments or accept lower initial credit limits

Ask to speak directly with the owner (if a small supplier) or credit manager (if a larger supplier)

What is trade credit insurance?

Trade credit insurance protects suppliers if a customer can’t pay their invoice. When the supplier takes out a policy, the insurer reviews their buyers’ financial health to set suitable credit limits and terms. If a customer doesn’t pay within the agreed terms, the supplier will inform the insurer who will step in to collect the debt on their behalf or pay the claim if the customer’s insolvent.

Trade credit insurance is common, particularly within manufacturing and construction, where invoice sizes are large and payment terms are long.

Alternatives to trade credit

If you need to free up your cash flow, there are other options to consider than trade credit:

Invoice finance: Unlock cash tied up in unpaid invoices, either by selling them (factoring) or borrowing against them (discounting)

Business credit card: Access short-term credit and potentially receive rewards like cash back, but you could be charged a high rate of interest if you don’t pay off the balance each month

Business loan: Borrow a fixed amount with interest if you’re funding a larger, longer-term investment

Bank overdraft: Use a pre-agreed borrowing limit on your business current account to cover short-term gaps in cash flow

B2B Buy Now Pay Later: A third party pays the supplier upfront, and you repay the provider in instalments

Cash on delivery: A straightforward option for new businesses without an established credit history, pay for goods or services upon delivery

Wrapping up

Trade credit is an accessible and straightforward way to bridge the gap between paying your suppliers and receiving payment from your customers. If your business needs to free up working capital, trade credit is worth looking into.

Here’s a reminder of the key points:

Trade credit lets you buy now and pay later, often interest-free if you settle on time

It’s a direct agreement between you and your supplier, unlike Buy Now Pay Later, which involves a third party

There are different types of trade credit, including open account to revolving credit, each suited to different business needs

It’s widely used across industries, from construction to retail and manufacturing

For buyers, it improves cash flow, simplifies admin, and can build credit history

For sellers, it boosts sales and customer loyalty, and offers a competitive advantage

If not managed properly, trade credit can result in late payment penalties and damage to your credit score

Applying is usually straightforward, but suppliers may ask for extra details and references if your business has a limited trading history

Trade credit insurance can protect suppliers against non-payment

Alternatives include invoice finance, business credit cards, loans, overdrafts, and B2B BNPL

Looking for longer-term finance? With a large panel of lenders and over £1.6 billion lent to UK businesses, Tide can help you find the right business loan for your needs. Borrow between £1,000 and £20 million, and get a quote without affecting your credit score.

Trade credit FAQs

Is trade credit internal or external finance?

Trade credit is external finance because it comes from outside your business, specifically from your suppliers. Unlike internal finance (eg retained profits or your own cash) trade credit is money you owe to another business for goods or services you’ve already received.

Is trade credit long term or short term finance?

Trade credit is short-term finance, with the most common terms being 30, 60, or 90 days. This makes it suitable for managing day-to-day cash flow, like buying inventory or covering seasonal peaks in demand.

What does net 30, 60, and 90 mean?

“Net 30” is another way of saying you’ve got 30 days to pay your invoice in full. “Net 60” and “net 90” work the same way, giving you 60 or 90 days respectively. The terms are written on your invoice and are legally binding.

Some suppliers also offer early payment discounts, such as "2/10 net 30," which means you get a 2% discount if you pay within 10 days, but the full amount is still due in 30 days if you don’t pay early.

Can a new business get trade credit?

A new business can often get trade credit but it can be harder than for established companies because there’s little or no trading history to show you’ll pay on time.

Instead, you might need to provide a business plan, use your personal credit history as a reference, or start with smaller credit limits. Once you’ve consistently paid on time, you’ll build trust with your supplier and should be able to access better terms.

Can trade credit impact your credit score?

Trade credit can impact your business credit score, both positively and negatively:

Paying on time or early can help build your credit history, as some suppliers report this to credit reference agencies

Late or missed payments can damage your credit score, making it harder to borrow capital later and potentially leading to suppliers refusing to offer you credit

Bear in mind that not all suppliers report to credit agencies. So it’s worth asking if they share payment history.

Is trade credit available for services as well as goods?

Many service-based businesses, like marketing agencies or IT providers, also offer trade credit.

What happens if I miss a trade credit payment?

If you miss a trade credit payment, your supplier may charge late fees or interest on the overdue amount. They’ll likely contact you first to request payment and see if you can work out a solution. If you can’t reach an agreement and the credit remains unpaid, they may escalate to a formal notice, cut off your trade credit, or even pursue legal action.

What’s the difference between a trade account and a trade line of credit?

Trade accounts and trade lines of credit are similar in that they both let you buy now and pay later. But they differ in how structured and flexible the credit is.

A trade account is a general arrangement where a supplier lets you buy goods or services on credit. You receive your order now and pay it by an agreed date.

A trade line of credit is a pre-agreed credit limit, like a business credit card, that you can draw from repeatedly. As you repay what you owe, the credit becomes available again.

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