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What is a Trade Credit?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 13 September 2016
  • Copyright Protected:
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    Conjecture Corporation
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Trade credits are open accounts extended to a customer by a vendor. The trade credit makes it possible for customers to place orders and receive goods and services without the need to pay in advance. More than one model of open account arrangements is utilized today, ranging from revolving credit to simple invoicing with specific terms of payment.

The most common model for trade credit is the acceptance and delivery of a customer order accompanied by an invoice. The invoice established terms of payment that the customer is expected to accept. Typically, a customer will have anywhere from fifteen to forty-five calendar days from the invoice date to render payment in full. If payment is not rendered with terms, the vendor may choose to apply additional charges to the account, or temporarily suspend credit privileges to the customer.

Vendors may also choose to establish a line of revolving credit for a customer. In this scenario, the vendor sets a credit limit based on the credit rating of the client. The customer is free to make use of the account as long as two conditions are met. First, the minimum monthly payment is received on time. Second, applicable finance charges are paid along with the principle balance.

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Establishing trade credit can be a great way for a new business to build a favorable list of credit references. Timely payment of outstanding invoices will help to make the business more attractive to lenders such as banks or private investors. Keeping up with trade credit payments paves the way for such financial assistance as establishing bank lines of credit, obtaining business loans, or receiving favorable interest rates on mortgages for a business site.

Trade credit is also extended to individuals. In the broadest sense, any time that goods and services are delivered and invoiced for payment at a later date, the consumer is receiving the benefit of trade credit. As long as payments are made according to terms, trade credit can be an excellent way of helping to establish or rebuild a solid credit rating.

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