Trade credit

Definition

Trade credit arises when a supplier lets you receive goods or services now and pay later — commonly on 30-, 60- or 90-day terms. Until you settle the invoice, the supplier is effectively financing that stock or service for you. It shows up in your accounts as creditors, the money you owe but have not yet paid.

A free source of finance

Used well, trade credit is the cheapest funding a business has, because there is usually no interest if you pay within terms. The longer your suppliers wait relative to how fast your customers pay you, the more of your operations they are quietly funding. That is why stretching creditor days fairly tightens your cash conversion cycle — see how to negotiate better supplier terms.

How it interacts with borrowing

Trade credit and a borrowing facility do the same job — covering the gap between paying out and being paid — so the more you secure from suppliers, the less you may need to draw. But it is finite and relationship-dependent: lean on it too hard, or pay late, and suppliers tighten terms or demand cash upfront, which suddenly worsens your cash position. A flexible working-capital facility complements trade credit by covering what suppliers will not, without putting those relationships at risk.