What Is Trade Credit and How Does It Affect My Business?

Half of all small businesses that receive financing don’t receive all the money they asked for.1 But trade credit can help businesses build their credit scores and financial qualifications for larger loans.

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Nothing feels better than finding the perfect solution to one troublesome problem—except, perhaps, finding one solution to two different problems. Trade credit can do just that for many businesses. Trade credit not only smooths out any cash flow issues a business might have but also helps your business build a strong credit history to show to lenders. In this post, you’ll learn more about trade credit, how it works, and how your own small business and customers can benefit from it.

What is trade credit?

Trade credit allows businesses to exchange goods and services more fluidly through financing. The supplier gives needed supplies to another business that promises payment in the near future. The supplier keeps its stock moving, and the other business receives supplies for their customers or employees on schedule, even if cash is currently tied up elsewhere.

Unlike most forms of financing, such as credit cards or term loans, trade credit is a short-term investment that involves little to no interest and uses a somewhat informal contract—more formal (but no less binding) than a pinky swear yet less ceremonial than your local bank. You might also hear these deals called supplier’s credit, supplier financing, or mercantile credit, which mean the same thing as trade credit. The term business credit mostly refers to a business’s credit score, however.

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How does trade credit work?

The seller, or supplier, usually sets the trade credit terms, which include how much the buyer owes for the product or service and how long the buyer has to pay the seller back. The deal will also include some type of late payment penalty and maybe a bonus for early payments.

Suppliers usually send an invoice along with the buyer’s order, letting the buyer know how much they owe. The total sum of a company’s short-term credit debts is dubbed accounts payable, which is, in other words, the various business accounts that a company needs to pay. On the opposite side, you might hear the terms accounts receivable or trade receivables, which refers to all the money a business (or supplier) is owed, and these amounts are normally recorded on the balance sheet.

A supplier might wait as short as a week or as long as three to four months to “receive” those accounts, but 30-day terms (net 30 is how the cool kids say it) are most common.  Some trade creditors with more expensive goods might allow longer collection periods, but cheaper, perishable goods offer little collateral for suppliers and must usually be paid back sooner. Returning that crate of bananas a month later isn’t worth much to a supplier.

What happens if you miss the due date on your payment? Suppliers usually include some type of late payment penalty in the terms to encourage timely payments, adding a percentage of the original invoice amount to the total money owed by the buyer. On top of the extra cost, a supplier might pass on their customers’ late payments to a credit reporting agency, and if you end up being one of those late-paying customers, it can hurt your future attempts at securing loans or lines of credit.

Pro tip
Paying on time or early is the best option. But when life happens, an email to the vendor before the due date often helps (and certainly doesn’t hurt).

Why is trade credit important?

The dangers of even short-term debt might scare a small-business owner away from supplier financing. But when used correctly, trade credit presents not only a low risk for your business but also a high reward.

While the demand varies depending on the business, receiving goods or services right as you need them is always useful. A net 30 deal (a 30-day repayment window) means you have a little wiggle room to pay off the supplies you bought. Otherwise, you might find yourself badly in need of goods while waiting for more income.

Additionally, you can begin—or continue—to build your business credit thanks to the short-term financing of mercantile credit. Credit reports from agencies like Dun & Bradstreet include trade credit terms in scoring. And like your ninth-grade algebra teacher, business credit doesn’t tolerate procrastinators too well. By finding opportunities to build credit now, no matter how small, your business slowly but steadily gains access to other types of financing and higher credit limits.

On top of all that, trade credit is generally the easiest type of business financing available—around 60% of small businesses in the US take advantage of it.2 And since it comes with either zero interest or low interest rates, your business won’t be paying too much extra to wait a bit on payment.

Where can I find companies that offer trade credit?

Much of the business world runs on trade credit, but many companies might not offer trade credit right away to a new business. While it’s easier to obtain the average supplier’s credit than a loan or line of credit from a major financial institution, suppliers can easily face a risk of protracted default, or failure to pay within a given timeline, with any brand-new company.

Fortunately, several companies offer trade credit terms to new businesses:

  • Home DepotIf you need landscaping, home improvement, storage, or construction supplies, then you might want to consider a commercial card account from Home Depot. They report your payment history to not only Dun & Bradstreet but also Experian and Equifax, which can help your business build credit.
  • Office Depot—You’ll struggle to find an office that can’t use occasional supplies from Office Depot. The aptly named chain helps you and your employees stay supplied with a business credit account. You’ll get several benefits in addition to beefing up your credit score.
  • Uline—From packing peanuts to paper towels, Uline has a lot of products that most companies need. If you reach out to their credit team, you can begin a net 30 billing option that will start building your business’s credit one paper towel roll at a time.
Fun fact

The curious pronunciation of depot is a result of its French origin. With few exceptions, a t on the end of a French word is silent. English speakers regularly follow this rule with depot but not bon appétit.

You can find all kinds of companies that offer trade credit, but you might need a business credit score or a certain amount of time as an established business for a deal.

Trade finance even spans different countries, but with it comes the added layers of difficulty from international trade. Occasionally, banks will work as mediators and offer a letter of credit to the vendor to encourage better terms. Now and then, companies might seek out a trade credit insurance policy (also called political risk insurance) to avoid the disastrous results from something like currency inconvertibility (a situation where a certain country will not convert one currency to another), which lies outside either company’s control. And sometimes governments will offer an export credit to help exporters compete overseas.

pro Business credit–building opportunities
pro Early payment discount and other incentives
pro Smoother accommodation for cash flow highs and lows
pro Little to no interest costs
con Occasional business experience requirement
con Inconsistent reporting to credit bureaus
con Late fees and other penalties if invoices are ignored
con Business credit risk if you miss payments

Honestly, trade credit is usually right for most businesses. As long as you can pay within the deal’s terms, you get several benefits with very few drawbacks. If you don’t know if someone in your current supply chain offers trade credit, you might want to ask them about it. Since you’re one of their customers, they’ll have extra incentive to work out a deal before you look elsewhere. And if you’re a brand-new small business, you can look to companies like Home Depot, Uline, and Office Depot to get similar benefits.

However, if you know your business would currently struggle with regularly late payments, you might want to wait. While reported on-time payments is a big plus for business credit, reported missed payments and other failed terms is a big minus.

Want more options? Fund your business with a personal loan.

The takeaway

Setting up a trade credit line with dependable suppliers can be an excellent way to build business credit and more conveniently manage company finances. But be sure you’re ready to meet payment dates on time or you could do your business more harm than good.

Have you dealt with trade credit in the past? Share your experience with us in the comments section below!

Trade Credit FAQ

How is trade credit different from bank credit?

Banks and credit unions offer immediate cash for business through loans, credit cards, and lines of credit. Trade credit, on the other hand, is when businesses offer other business products or services with specified terms where the buyer pays the cost of those goods at a later date.

What is the formula for the cost of trade credit?

Trade credit terms are often represented by three numbers: the first two indicate a discount percentage and discount period while the last shows the final due date. If you’re curious how the discount period would affect cost, you can use this formula:

trade credit image

How can I get trade credit?

If you’re considering opening a trade credit line, you should check with any current suppliers you work with first. You can also start other vendor accounts, but keep in mind that you might need a D-U-N-S number as part of their terms.


At Business.org, our research is meant to offer general product and service recommendations. We don't guarantee that our suggestions will work best for each individual or business, so consider your unique needs when choosing products and services.


  1. United States Federal Reserve System, “2015 Small Business Credit Survey.” Accessed July 14, 2022.
  2. Investopedia, “Trade Credit.” Accessed July 14, 2022.
Sarah Ryther Francom
Written by
Sarah Ryther Francom
Sarah is Business.org’s senior content editor. She has more than 15 years of experience writing, editing, and managing business-focused content. As the former editor-in-chief of Utah Business magazine, Sarah oversaw the state’s premier business publication, developed several custom publications, and managed all business-to-business content. She also co-authored a business book with FJ Management CEO Crystal Maggelet. Sarah is passionate about helping small-business owners reach sustained success.
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