Today, offering trade credit is essential for companies wishing to conquer new markets and build a long-term commercial relationship. The advantages of trade credit make it indispensable in certain sectors such as distribution or construction. Trade credit does involve various risks, but there are ways to control them effectively.

What is trade credit?

Here is a trade credit definition: an agreement between two B2B companies, where a supplier of goods or services accepts a deferred payment from its customer.

This agreement does not cost your customer anything: they don’t pay any fees or interest.

A trade credit agreement is a sort of 0%-loan – referred to as a “commercial loan” – that you grant your customer when invoicing a product.

When making this agreement, you need to define invoice payment terms to provide details about the expected payment and specify how much time your customer has to pay.

 

The advantages and disadvantages of trade credit 

 

Advantages of offering trade credit

The pros and cons of getting trade credit – customer perspective

Trade credit is a potential important source of financing for your customer. Such loans are registered as “accounts payable” on your customer's balance sheet: they make up part of the company's working capital and have a direct – and positive – impact on its cash flow.  

Source: Zawya

Disadvantages of offering trade credit

On paper, trade credit looks like free money to the customer. However, failure to meet payment schedules can result in major penalties according to the negotiated terms, as well as damage the customer's reputation and its relationship with the supplier.

You should always check your customer’s credit history or run customer credit checks before contracting with a new customer.

Is trade credit for all industries and companies?

The advantages of offering trade credit – as mentioned above – are crucial for certain industries, notably those with strong inventory costs and challenges. For example, distribution or construction where trade credit helps the customer finance its inventory with its working capital.

All sizes of business can benefit from it, although mid-sized companies are best positioned to benefit from the advantages of trade credit: they have greater bargaining power than SMEs, but fewer financing options than large companies.