What Is Trade Credit? How Supplier Terms Work, What They Cost and How to Use Them

Last updated: November 2026

Trade credit is when a supplier lets a business buy goods or services now and pay later, on agreed terms such as "net 30" (pay the full invoice within 30 days). It is a business-to-business arrangement, usually unsecured and with no stated interest, recorded as accounts payable by the buyer and accounts receivable by the supplier. A Federal Reserve working paper calls trade credit the most important form of short-term finance for firms. It isn't always free: skipping an early-payment discount such as 2/10 net 30 is equivalent to borrowing at an annual rate of about 37%.

How trade credit works

1. You apply for terms. Many suppliers ask for a credit application with business details, bank and trade references, and sometimes financial statements or a personal guarantee.
2. The supplier sets a limit and terms. For example, a $10,000 limit on net 30.
3. The supplier delivers and invoices. The unpaid invoice is your account payable and the supplier's receivable.
4. You pay by the due date. Paying on time keeps the account open and can lead to higher limits or longer terms.

Trade credit is large: in 2019, U.S. non-financial firms had about $4.5 trillion in trade credit outstanding, equal to 21% of U.S. GDP, and trade credit use tends to grow as a buyer-supplier relationship lengthens, with firms moving from cash in advance to credit terms (Federal Reserve, International Finance Discussion Paper 1303, 2020).

Common trade credit terms

Term	Meaning
Net 30 / net 60 / net 90	The full amount is due 30, 60 or 90 days after the invoice date
2/10 net 30	Take a 2% discount if you pay within 10 days; otherwise the full amount is due in 30 days
1/10 net 30	A 1% discount for payment within 10 days
EOM (end of month)	The term starts at the end of the month in which the invoice is dated
COD / CIA	Cash on delivery / cash in advance: no trade credit
Credit limit	The most you can owe the supplier at one time

Types of trade credit

• Open account: the most common. The supplier ships and invoices, and you pay on terms, with no separate note.
• Promissory note: you sign a written promise to pay a set amount by a set date, used for larger or riskier orders.
• Trade acceptance: a draft the buyer signs ("accepts") to commit to pay at a future date, more common in international trade.
• Consignment: you hold the supplier's goods and pay only when they sell (the supplier keeps ownership until then).

Is trade credit free? The real cost of skipping a discount

When no discount is offered, paying on net terms has no direct finance charge. When a discount is offered, not taking it has an implicit cost:

Implicit annual cost = discount % ÷ (100% − discount %) × 365 ÷ (full-payment days − discount days)

Terms	Calculation	Implicit annual cost
2/10 net 30	2 ÷ 98 × 365 ÷ 20	about 37.2%
1/10 net 30	1 ÷ 99 × 365 ÷ 20	about 18.4%

Hypothetical example: on a $20,000 invoice at 2/10 net 30, paying on day 10 costs $19,600. Waiting until day 30 costs $20,000, so you pay $400 to keep $19,600 for 20 more days. If a business line of credit costs less than 37% a year, drawing on it to take the discount saves money. Late payment can add late fees and lose you the terms altogether.

Advantages and disadvantages

	For the buyer	For the supplier
Advantages	Preserves cash; matches payments to sales; no separate loan application; builds a payment record	Wins and keeps customers; supports larger orders
Disadvantages	Missed discounts can be expensive; invoices can stack up; limited to that supplier; late payment hurts the relationship	Carries unsecured credit risk; ties up its own cash in receivables

Trade credit vs. other short-term financing

Option	Who provides it	What it pays for	Cost
Trade credit	Your supplier	Purchases from that supplier only	Usually no stated interest; implicit cost if a discount is skipped
Business line of credit	Bank or non-bank lender	Any business expense	Interest on draws, plus fees
Term loan	Bank or non-bank lender	A one-time investment	Interest and fees on the full amount
Invoice factoring	A factor	Your own receivables turned into cash	Discount fees based on how long invoices are outstanding

If you are the supplier extending trade credit and your customers pay slowly, you can sell or borrow against those receivables; see invoice factoring. Your unpaid invoices are explained in outstanding invoice meaning.

Trade credit insurance

Suppliers can insure their receivables against buyer nonpayment through private trade credit insurers or, for exports, the Export-Import Bank of the United States. EXIM's export credit insurance covers commercial and political risks on foreign receivables, up to 95% of sales invoices, so exporters can offer open-account terms to foreign buyers (EXIM). Specialist insurance brokers and trade credit consultants can help compare policies, limits and premiums.

How to get and manage trade credit

• Start small. Ask regular suppliers for modest net-30 terms and pay exactly on time.
• Keep your business information consistent (legal name, EIN, address) across suppliers and credit bureaus.
• Ask suppliers whether they report payments to business credit bureaus; on-time payments reported there can help build your business credit file.
• Track due dates weekly and line them up with your receivables in a cash flow forecast.
• Take discounts when the math works, and call the supplier before a due date if a payment will be late.
• Renegotiate from strength: after a run of on-time payments, ask for a higher limit or longer terms, one change at a time.

Frequently asked questions

Is trade credit the same as accounts payable?

Trade credit is the arrangement; accounts payable is how the unpaid supplier invoices appear on the buyer's balance sheet (a current liability).

Is trade credit debt?

Yes, in substance. It is an obligation to pay the supplier, usually short-term and unsecured. Lenders typically count trade payables when they review your liabilities.

What is free trade credit?

Credit terms with no interest and no early-payment discount, such as plain net 30. Paying on the due date costs nothing extra, though the supplier may build the cost of credit into its prices.

Can a new business get trade credit?

Often, starting with smaller limits, sometimes with a personal guarantee or a deposit. Limits usually grow with payment history.

Where FSE fits

FSE is an independent business-funding brokerage compensated by its funding providers. FSE never charges the business any fee. If supplier terms don't cover your full working capital needs, FSE compares line-of-credit, working capital and factoring offers from its lending partners in one application. Partners generally require at least 1 year in business and $10,000 or more in monthly revenue, and each lender sets its own terms. Apply with FSE to see your options.