Trade credit is a widely used form of short term finance. It allows you to receive goods or services from another business and delay payment until an agreed date in the future. Instead of paying upfront, you receive the invoice and settle it after a set period, which is usually 30, 45, 60 or 90 days. This arrangement helps you manage cash flow, support growth and build stronger trading relationships.

Trade credit matters to both sides of a commercial transaction. You may depend on it to ease cash flow pressures, while businesses you supply may use it as a way to increase sales and develop long term customer loyalty. Because trade credit relies on trust, both sides need reliable information about the financial stability of the businesses they trade with. Business credit scores, credit limits and credit checks play an essential role in helping you make safe and informed decisions.

How trade credit works

Trade credit works through a straightforward agreement between you and a supplier. The supplier agrees to provide goods or services immediately, and you agree to pay the invoice on a specified date. Although this arrangement feels simple, it is effectively a form of lending. The supplier allows you time to pay, which means the supplier takes on financial risk for the duration of the payment term. Payment terms vary depending on the supplier’s policies, your financial history and the nature of the order. A business with a strong credit profile may be offered more generous terms, while a business with limited or weaker credit information may be offered shorter deadlines or be asked to pay upfront. Because of this, your business credit score and credit limit play a significant role in shaping the terms you receive, as they help suppliers assess how reliable your payments are likely to be.

Why trade credit matters to buyers

Trade credit is valuable to you as a buyer because it creates financial flexibility and supports operational stability. When you don’t need to pay for goods or services immediately, you can keep cash available for other essential priorities. For example, you might need to cover wages, invest in stock or support ongoing marketing activity while waiting for customer payments to arrive.

Access to trade credit also allows you to take on larger contracts or respond more quickly to new opportunities. Because you have more time before payment is due, you can generate revenue from the goods or services before settling the invoice. This removes some of the financial pressure associated with fast growth or seasonal fluctuations and reduces the need for short term borrowing from lenders.

Paying suppliers on time also helps you build strong relationships. Over time, reliable payment behaviour can result in more favourable terms, including larger credit limits, longer repayment periods or priority access during busy seasons. These benefits can make a meaningful difference to how smoothly your business operates.

Why trade credit matters to suppliers

Trade credit is strategically important when you act as a supplier. Offering credit terms makes your business more attractive to customers because it provides flexibility that many buyers expect. When customers are able to purchase goods or services without paying upfront, they may place larger orders and trade with greater frequency. This can lead to increased sales and more stable revenue for your business. Offering trade credit also helps you to strengthen relationships with your customers. When you trust a customer enough to extend credit, the customer often feels more valued and is more likely to continue trading with you in the long term. This can create a more predictable and loyal customer base.

Extending trade credit does also carry some financial risk for you as a supplier. If a customer pays late or fails to pay at all, you experience an immediate cash flow impact. Because of this, you need to assess risk carefully before deciding how much credit to offer. Credit checking your customers, reviewing their credit limits and regularly monitoring for changes in their credit profiles are effective ways to protect your business from these credit risks. These steps help you spot early warning signs of potential financial difficulty so you can take action early.

How suppliers decide whether to offer trade credit

If you're a supplier, you should follow a detailed process before agreeing to offer trade credit to a customer. Each step helps you understand the customer’s financial strength and assess the level of risk involved. The first step is to check the customer’s business credit score. This score summarises how reliably the customer has paid other companies in the past and indicates how likely they are to pay future invoices on time. A higher score generally suggests lower risk of late or non payment. You can also review the customer’s business credit limit. This limit reflects the amount of credit that credit reference agencies believe the business can manage comfortably. Many suppliers use this figure as a starting point when setting their own internal credit limits for new customers. On a business' credit profile, you'll also see the customer's payment history. If the customer has a track record of late payments, missed payments or outstanding debts, this increases the likelihood of future problems.

Reviewing the customer’s financial accounts, where available, can also provide useful insights into profitability, cash reserves and overall financial stability. Once you have gathered this information, you decide how much credit to offer and what terms to apply. You then clearly set out the payment expectations so both parties understand their responsibilities. If you're looking for more information on how to decide whether to offer trade credit, read our article on how to set trade credit limits.

How buyers decide whether to accept trade credit terms

When you act as the buyer, you also need to assess suppliers carefully before entering into trade credit arrangements. Accepting credit from a supplier means relying on them to deliver on time and maintain consistent service, so financial stability is important. You should check the supplier’s credit profile to ensure that the company is financially reliable. A strong credit score suggests that the supplier is stable and capable of fulfilling orders without disruption. Reviewing a supplier’s trading history and financial information can also help you understand their capacity and long term reliability.

It's also important for you to read and understand the payment terms in full. You need to know exactly when payments must be made, whether any early settlement discounts are available, and whether any penalties or interest will be charged for late payment. Understanding these details helps you plan your cash flow and avoid unexpected costs.

What are the types of trade credit?

There are several types of trade credit, each suited to different trading needs:

• Standard trade credit involves receiving an invoice with payment due at a later date and is the simplest and most widely used form of trade credit.

• Stage payments allow you to pay in instalments at agreed milestones during longer or more complex projects, which helps both sides manage cash flow.

• Credit accounts provide one monthly statement covering all purchases instead of multiple invoices, making record keeping easier.

• Consignment stock lets the supplier provide goods while retaining ownership until they are sold or used, meaning you only pay once the goods have been sold and your upfront costs are reduced.

• Early settlement discounts offer a lower price when you pay the invoice before the due date, which encourages prompt payment.

• Pay-as-sold or revenue linked agreements let you pay the supplier once revenue has been generated from the goods, easing pressure during quieter periods.

Accessing a higher trade credit limit

As your business grows, you may need more generous credit terms to support larger orders and maintain steady cash flow. At Capitalise we can help you access higher trade credit limits by strengthening the information that credit agencies hold about your business. Through our Credit Review service, we update and improve your credit profile, and in 96% of cases businesses see an increase in either their credit score or their credit limit. A stronger financial profile makes it easier to secure higher limits and negotiate better terms with suppliers. This gives your business greater flexibility, more opportunities to grow and added confidence when managing your supply chain.