The advantages and disadvantages of trade credit

Trade credit is a type of short-term financing provided by suppliers to their customers. It lets a business buy goods or services in the moment and pay for them at a later date, and it's often the simplest form of short-term borrowing a business can access.

Trade credit is common between businesses. Terms are usually set as a number of days, with 30, 60 or 90 days typical and some suppliers offer a discount for paying early.

Here’s how trade credit works in practice. Say a retailer agrees 30-day terms with a wholesaler and receives £10,000 of stock on 1 March. Payment isn't due until 31 March, so the retailer can start selling that stock before any cash leaves the business. If the wholesaler offers 2% off for paying within 10 days, paying early would save £200, in exchange for giving up 20 days of credit.

On the buyer's balance sheet, money owed to suppliers under trade credit is recorded as a current liability, known as trade payables.

This brief guide covers the main advantages and disadvantages of trade credit, so you can decide how it fits into the way you manage your business's cash flow.

Advantages of trade credit

Let’s look at the multiple pros of using trade credit.

Easy to obtain

Trade credit can be simpler to get than other types of finance. Many suppliers only ask you to complete a credit application, and there's typically far less paperwork than a bank loan. Suppliers may still run a credit check, but the bar is usually lower than for formal lending.

Low or no interest

Some suppliers don't charge interest on trade credit, as long as you pay within the agreed terms. 

This can make it one of the cheapest ways to manage your cash flow and keep costs down.

Helps build relationships

Using trade credit and paying on time helps build trust with your suppliers. Over time, that can lead to better terms or a higher credit limit. A good payment record can also help when you approach new suppliers.

Improves cash flow

Trade credit lets you receive stock or services before you pay for them. This can help bridge the gap between paying your costs and getting paid by your own customers. 

For seasonal businesses, it can also help cover the cost of stocking up before a busy period.

Flexible payment terms

Payment terms can often be agreed to suit your business, whether that's longer payment terms or paying in instalments. 

Both can make your outgoings easier to plan. It's worth agreeing terms in writing, so both sides are clear on due dates and any discounts.

Disadvantages of trade credit

There are also important cons to keep in mind.

Higher cost

Trade credit can still cost more than paying upfront. Paying straight away can earn you an early payment discount or make you a priority customer when stock is limited. 

Some suppliers may also build the cost of offering credit into their prices.

Limited availability

It is only available from suppliers that are willing to offer it. 

Not every supplier will extend credit, particularly to newer businesses, which can limit your options.

Risk of damaging relationships

Trade credit depends on paying your suppliers on time. Late or missed payments can damage these relationships and may lead to stricter terms or credit being withdrawn. 

Suppliers can also charge interest on overdue invoices.

Overdependence

Relying heavily on trade credit from one supplier can make you dependent on them. 

If they reduce or withdraw your credit, you may struggle to buy what you need and switching suppliers means building a new relationship from scratch.

Might damage your credit rating

Paying suppliers late can harm your business's credit rating. In turn, this can make it harder to access other finance later.

Keep your business moving with Funding Circle

Funding Circle’s FlexiPay is a line of credit that can complement or replace the trade credit you currently use. It's available up to £250,000, and you can use it to pay suppliers, buy stock or equipment and cover other business costs.

It can give your business more flexibility to:

• Pay upfront or buy in bulk to secure discounts

• Meet suppliers’ minimum order requirements

• Manage unexpected business costs without disrupting cash flow

• Negotiate more favourable terms with suppliers

• Pay suppliers on time when customer payments are delayed

There's no interest to pay. Instead, you pay a flat fee from 1.99% each time you use it and repay over 1to 12 months. You can apply for FlexiPay with no impact on your credit score. Note, 1 month repayment terms may not be available on all accounts.

Trade credit FAQs

What is trade credit in business?

Trade credit in business is an arrangement where a supplier lets you buy goods or services now and pay for them later, usually within 30 to 90 days. It's one of the most common forms of short-term finance between businesses.

What are the main advantages of trade credit?

The main advantages of trade credit in business are improved cash flow, little or no interest if you pay on time and easier access than most other finance. It can also strengthen your relationships with suppliers, which may lead to better terms over time.

What are the main disadvantages of trade credit?

The main disadvantages of trade credit in business are that it can cost more than paying upfront if you miss out on early payment discounts and it's only available from suppliers willing to offer it. 

Relying on it too heavily can leave you dependent on certain suppliers and paying late can damage your credit rating.

Is trade credit the same as a business loan?

No. A business loan gives you a lump sum from a lender, which you repay with interest over an agreed term. Trade credit comes from your supplier, is tied to specific purchases and is usually settled within weeks.

How does trade credit affect a business's cash flow?

Trade credit improves short-term cash flow by letting you receive stock or services before you pay for them. 

The invoice still has to be paid on the due date, so it's worth planning for it in your cash flow forecast.

Disclaimer

13/10/26 – While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.