Trade Credit Explainer
Trade credit arises when a supplier delivers goods or services before the customer pays. Terms such as net 30 give the buyer time to generate sales or cash before settlement. For many companies, accounts payable is a major source of short-term operating finance and accounts receivable is a major use of supplier capital.
The supplier sets credit limits, payment dates, discounts, late charges, and collection procedures after assessing the buyer. An early-payment term such as 2/10, net 30 offers a discount for prompt settlement. Declining that discount can imply a high annualized financing cost even though no explicit interest rate appears.
Buyers benefit from flexible working capital and lower transaction friction. Suppliers can support sales and customer loyalty, but they assume default, delay, concentration, and administrative risk. Credit insurance, guarantees, factoring, and tighter limits can reduce exposure while adding cost or complexity.
Aggressive extension of terms can create hidden strain in a supply chain. Buyers should treat supplier liquidity as an operational dependency, not free money. Suppliers should monitor aging, disputes, ownership changes, industry stress, and repeated broken promises, then adjust limits before a slow account becomes a material loss.
Goods or services arrive before cash is due.
The buyer records a payable and the supplier a receivable.
Early-payment discounts reward faster settlement.
Forgoing them can imply a high financing cost.
Late payment can weaken critical suppliers.
Limits, monitoring, and diversification reduce concentration.
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