Trade credit
Trade credit allows your business to buy goods or services from suppliers and pay them at a later date. If you’re looking to improve cash flow or manage seasonal demand, trade credit could be an effective solution for your business.
If you need cash immediately or have unpredictable revenue, you may find invoice finance or business loans more suitable.
What is trade credit and how it works
What is trade credit?
Trade credit is a common and valuable way for UK businesses to improve cash flow. It allows you to buy goods or services and pay later - usually within 30, 60 or 90 days.
Whether you’re managing inventory, dealing with seasonal demand, or trying to bridge cash flow gaps, trade credit can help your business operate smoothly without upfront payment.
How does trade credit work?
With trade credit, a supplier agrees to let you buy now and pay later. This can be based on an agreed number of days (known as net terms) - such as net 30, meaning payment is due 30 days after the invoice date.
Here's how it typically works:
you place an order with a supplier
the supplier ships goods or delivers services
you receive an invoice with a payment term (e.g. 30 days)
you pay by the due date or risk late fees and credit score damage
Trade credit can function as a short-term, interest-free loan between businesses.
Example of trade credit in action
A retailer orders £10,000 worth of inventory from a supplier on net 60 terms. This means they have 60 days to pay for the goods.
In that time, they can sell the stock and generate revenue - reducing the need for external finance to cover purchase costs.
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Who uses trade credit?
Retail and wholesale
Retailers and wholesalers frequently rely on trade credit to stock inventory without paying upfront. This allows them to sell products and generate revenue before settling their accounts with suppliers — a crucial cash flow lever, especially during seasonal peaks.
Manufacturing and supply chain
Manufacturers use trade credit to buy raw materials and components needed for production. This is particularly valuable in just-in-time manufacturing, where timely delivery and payment flexibility ensure the production cycle isn’t interrupted.
Construction and industrial machinery
In construction, trade credit is used to procure building materials, tools, and equipment while projects are underway. Extended terms help contractors manage staged payments, fluctuating costs, and long project lead times.
Food and drink distribution
Food wholesalers, distributors, and caterers often use trade credit to purchase perishables and non-perishables. It enables them to keep shelves stocked or fulfill bulk orders while synchronising payment with incoming revenue from customers or retailers.
Import/export businesses
Importers and exporters rely on trade credit when sourcing goods from international suppliers. Credit terms help them cover customs clearance, logistics, and resale timelines before remitting payment, which is especially important when dealing with currency fluctuations or delayed shipping.
Is trade credit right for your business?
Trade credit vs other finance options
Feature | Trade credit | Business loan | Overdraft | Invoice finance |
Interest charged | No (if on time) | Yes | Yes | Yes |
Repay only if used | Yes | N/A (fixed loan) | Yes | Yes |
Approval process | Supplier agreement | Formal application | Bank assessment | Lender agreement |
Suitable for | Inventory, services | Growth projects | Emergency spend | Invoice-based gaps |
Flexibility | Medium | Low | High | High |
Risks and disadvantages
late payment fees or damaged supplier relationships
potential impact on business credit score
over-reliance can create cash flow strain if mismanaged
Late payments are a major issue in the UK SME economy. The Federation of Small Businesses reports that over 50,000 businesses a year go under due to late payments.
[Source: GOV.UK – Crack down on late payments in major support package for small businesses]
How to stay in control
To make trade credit work for you:
Track all payment deadlines in your accounting software
Monitor supplier terms across your purchases
Avoid overextending credit with multiple suppliers
Build contingency plans in case income is delayed
Communicate with suppliers if issues arise
Can you get financing based on trade credit?
Yes. If you're offering trade credit to your customers and waiting to get paid, you may be eligible for funding options like:
invoice finance - unlocks cash tied up in unpaid invoices
revenue-based finance - repayments based on your turnover
revolving credit facilities - flexible access to short-term working capital
Benefits of using trade credit
improves short-term cash flow
reduces reliance on external finance
builds trust and relationships with suppliers
may lead to early payment discounts or improved terms
How to manage trade credit effectively
Set clear terms with your suppliers and customers
Check credit scores of new customers
Follow up on unpaid invoices before due dates
Avoid overextending payment terms beyond your cash capacity
Learn more about trade credit
How long does the trade credit approval process usually take?
Established businesses can be approved in as little as a couple of weeks. Newer businesses may have to wait up to four weeks (or more) for approval while the supplier conducts more thorough due diligence.
Can I negotiate better terms once I’ve proven reliable with payments?
Probably! Suppliers are often willing to review terms annually or once you’ve built up a consistent track record of payments.
You can leverage your positive payment history to ask for extended terms or early payment discounts, for example.
What’s the difference between trade credit and a business loan?
Trade credit can be provided by suppliers to help businesses pay for specific purchases at a later date. There’s no interest, but late fees may be due.
In contrast, business loans provide businesses with cash upfront which has to be repaid with interest.
How does trade credit appear on my business credit report?
Trade credit history generally appears on your business credit report and can affect your credit rating. Consistent payments can help improve your credit rating while late payments can damage your score.
What happens if my supplier goes out of business while I owe them money?
You’ll still have to pay. Typically, money still owed to a supplier after it goes out of business will be transferred to an administrator or debt collector.
Is there a limit to how much trade credit I can access?
Yes. Your supplier will limit your maximum credit amount depending on your business revenue, payment history and the length of your relationship with them. Generally, suppliers increase the limit over time as your reputation grows.
Can I use trade credit to improve my cash flow forecasting?
Yes, predictable payment terms can help manage your cash flow. But remember to account for repayment dates and make sure there’s enough money in the bank when payments are due.
How do I handle disputes over goods quality when using trade credit?
Speak with your supplier immediately if you’re not happy with the quality of goods but keep up your repayments.
Most suppliers will take your concerns seriously to preserve the relationship so long as you keep to your end of the agreement.
Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.
It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.
Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.
Joe Morley
Head of Unsecured Lending
Joe has worked in the alternative lending space since 2015. During this time he has helped hundreds of SMEs access millions in essential funding ranging from long-term asset-backed lending to short-term unsecured revolving credit lines and beyond. In his role, Joe manages and supports a large team of Credit Finance specialists.