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.

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 deferments granted generally range from one week to three months, and are counted in number of days (7, 10, 30, 60...).

At times, you may set up a discount to your customer in case of early payment.

Example. A customer is granted a trade credit with terms of “5/10 net 30: If payment is made within 10 days, the customer is offered a 5% discount. If not, the full amount is due within 30 days.

Conversely, penalties for failure to meet payment deadlines can be set against a bad payer, usually through interests (around 8-10%) on the outstanding debt owed from the day after the due date of your contract. In certain cases, you can also ask to get compensation for debt collection costs.

In many countries, like those in the European Union, such penalties are statutory and benefit from a regulatory framework. You should check the laws that apply to your contract before setting your payment terms.

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.  

For more information on this advantage of trade credit, you can read our article on How trade credit secures your cash flow

(Source: Nerd Wallet)
Another advantage of offering trade credit is that it can help companies to finance their current operations, especially during certain periods of high activity (for example, a retailer as the holidays draw near). It’s also very useful for new businesses or startups that don’t have access to bank loans or sufficient fundraising yet.

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.

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.


If you’re a supplier, from your perspective, trade credit has multiple advantages. It is an effective way for you to win new contractsincrease your business volume and build loyalty among your customers.

Still, trade credit also has its disadvantages. A commercial loan is an account receivable that weighs on your working capital and cash flow. It is cash that isn’t collected on the date of invoicing.

Above all, you expose yourself to the risk of late payment or non-payment. This is bad debt, which is potentially very difficult to recover – especially if your customer goes insolvent or bankrupt.

(Source: ChaseHQ)
Ultimately, trade credit requires significant internal resources to be efficiently managed – especially in case of complications.

To manage such risks and to make the most of the advantages of offering trade credit, good cash flow management is key. For detailed tips and advice on cash flow, you can download our eBook how to protect your cash flow.

Another solution is trade credit insurance. It provides you with predictive protection and compensation in the event of a bad debt. Concretely, it means that if a customer doesn’t pay you on time, the insurer will reimburse a percentage of the outstanding credit. This type of coverage is very flexible and can cover all or part of your customer portfolio.

Other credit risk solutions make it possible to have your receivables financed while they are being collected, or even to assign them to a third party. Each solution has its own advantages and disadvantages.

In conclusion, offering trade credit has many advantages. It is a powerful tool for you to accelerate your commercial development and improve your customer relations, with limited risk if properly controlled.

Solutions like trade credit insurance prove very useful and efficient for managing trade receivables and making use of all the advantages of offering trade credit.

For a free credit insurance consultation call our UK team, 09:00-17:00 Mon-Fri.