What is Trade Credit?
Trade Credit is a form of short-term trade financing in which the seller allows the buyer to defer payment for the goods or services purchased. Instead of requiring immediate payment, the seller agrees to a specific payment term, which can range from a few days to several months.
Trade credit is one of the most common financing mechanisms in trade because it increases the buyer’s liquidity, enabling him to sell goods before having to pay for them. This allows companies to conduct their operations without having to commit their entire capital at once. In some cases, trade credit also represents a sign of trust between the parties, as the seller bears the risk that the buyer may not fulfill their payment obligations on time.
Frequently asked questions (FAQ)
1. What are the standard terms of trade credit?
The most common terms are:
- Net 30 / Net 60 / Net 90 – The buyer has 30, 60 or 90 days to settle the payment.
- 2/10 Net 30 – If the buyer pays within 10 days, they receive a 2% discount, and full payment is required by the 30th day.
- Open Account – Buyer receives goods and payment is due at a later date without prior credit arrangements.
2. Does Trade Credit accrue interest?
Usually, there is no formal interest, but failure to pay on time can result in contractual penalties or the loss of discounts offered by the seller. Additional fees may apply for long-term trade credits.
3. What are the main benefits of trade credit for the buyer?
Improved liquidity, as the buyer can sell the goods before paying for them.
The opportunity to negotiate better commercial terms.
Additional time to raise funds, which is especially important for companies with seasonal sales. 4. Does the seller bear the risk in Trade Credit?
Yes, because the buyer may not pay on time or at all. For this reason, some sellers use receivables insurance or factoring to minimize the risk of financial loss.
4. Which industries use trade credit the most?
Trade Credit is widely used in retail, food, construction and automotive industries, where liquidity and stock rotation are crucial for the company’s operations.
Trade Credit is a key mechanism that supports trade and enables the development of enterprises, but it requires diligence in receivables management to avoid the risk of payment bottlenecks.
