Trade Credit

Trade credit is a commercial arrangement where a supplier provides goods or services without requiring immediate payment. Instead of settling each transaction on delivery, the buyer and supplier agree a payment period - commonly expressed as net 30, net 60, or net 90 days from the invoice date. The buyer receives the goods, uses them to complete work or fulfill orders, collects revenue from customers, and pays the supplier within the agreed window. For small to medium-sized businesses, trade credit is often the most accessible form of working capital support available without a bank application.

In the UK, the Small Business Commissioner notes that where payment terms have not been explicitly agreed in writing, trade credit defaults to 30 days from invoice acceptance under the Late Payment of Commercial Debts (Interest) Act. In practice, most suppliers set terms clearly at the point of opening an account, and many in construction and manufacturing extend terms of 60 to 90 days for established customers with strong payment histories.

How Trade Credit Works in Practice

When a roofing contractor opens a trade account with a builders' merchant, or a promotional merchandise distributor sets up a supplier account with a decoration house, they are applying for trade credit. The supplier assesses creditworthiness - reviewing years in business, trading history, and often requesting credit references - then sets a credit limit and payment period. Once approved, the buyer can place orders up to that limit and settle monthly rather than paying by card or bank transfer on each individual transaction.

The practical benefit is timing. A contractor ordering materials on 60-day terms can deliver the job, invoice the client, collect payment, and settle with the merchant before the credit period expires - without using their own reserves as a bridge. This is why trade credit remains the foundation of working capital management for most trade and project businesses. It is not free money, but used correctly it aligns supplier payment outflows with client payment inflows.

Trade credit also comes with obligations. Suppliers can charge statutory interest on overdue amounts under the Late Payment of Commercial Debts Regulations. Persistent late payment can lead to credit limits being reduced or accounts being placed on pro-forma terms - where payment must be made before goods are dispatched. Some suppliers offer early payment discounts, such as 2% for settlement within 10 days, to encourage prompt clearing of accounts.

Managing Trade Credit as a Buyer

The most common mistake is treating the credit period as a flexible overdraft rather than a working capital tool with a fixed end date. Businesses that routinely pay past their agreed terms damage supplier relationships, reduce their chances of having credit limits increased when business volumes grow, and risk account suspension at the worst possible moment.

Good trade credit management means knowing the outstanding balance on every supplier account, the due date for each invoice, and the credit headroom remaining before the limit is reached. Where a business has customers who pay in 45 days and suppliers who require settlement in 30 days, there is a 15-day funding gap that trade credit alone cannot bridge - and that gap needs a deliberate plan.