What is Trade Credit

Trade Credit is the practice of businesses selling to other businesses and allowing those other businesses to pay for the goods on a deferred basis. The extent of the deferral varies but, for example, invoices which demand payment within 90 days are not uncommon. Sometimes a percentage discount may be given for earlier payment.

Most businesses both buy from and sell to other businesses. Therefore trade credit can be either a boon or a bane for them. If business customers take a long time to make payment on the invoices that have been issued, the selling company can find itself in cash flow difficulties. Even with a healthy order book and a high level of profitability, the company can be affected catastrophically by a lack of cash on hand, meaning it is unable to pay its own bills. On the other hand, by delaying payment to the maximum extent, a company without much operating capital can get by, perhaps using its purchases as inputs to its own business process and selling its own goods, realizing a profit, before the invoice for those inputs comes due. In this way, the purchases can literally pay for themselves and even a company with no money could afford to acquire the inputs needed for its own business processes.

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What is trade credit?

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