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?
Trade credit lets your business get goods or services now and pay later under agreed terms (e.g. 30 days). There’s no interest, but late payments usually incur penalty fees. Explore the advantages and disadvantages of this finance option below.
How important is trade credit finance in the UK?
Trade credit is an important part of business finance, helping thousands of UK businesses manage their cash flow more effectively - over a quarter of SMEs use trade credit regularly as a source of finance.
With it: Smaller businesses can order more stock to cope with seasonal demand, and manufacturers can buy raw materials without tying up working capital.
Without it: Businesses may struggle with limited cash flow and could face stock shortages or miss growth opportunities.
Is it easy to get trade credit?
Trade credit is one of the most accessible types of business financing available. You don’t need to submit an application, and you don’t need a formal credit agreement. Instead, you can negotiate with your supplier directly.
How to negotiate trade credit terms
You’ll need to prepare well to get the best trade credit terms.
How to approach suppliers confidently
Present trade credit as a business opportunity for your supplier. Explain how formal terms can help you plan more effectively and potentially increase future order sizes. Show them how it’s a win-win arrangement for you both.
What to ask for and when to compromise
You could ask for extended payment terms during your quieter trading periods, early payment discounts when you’re flush, and higher credit limits as your business grows. But be prepared to meet them halfway as you build up your reputation.
What to do if your business has a limited trading history
Starting small and building up a history of paying on time can lead to future rewards. You could consider offering a personal director guarantee, presenting a realistic business plan or suggest terms that gradually improve as you build up a reliable payment history.
How to manage trade credit effectively
Strengthen your supplier relationships and improve your cash flow by managing trade credit effectively.
Set up internal tracking systems
Trade credit arrangements can quickly become complicated if you’re not organised.
Create a simple system to keep track of payment terms and due dates
Create automated reminders so you don’t miss a payment
Factor in any internal approval processes that could cause delays
Monitor your payment metrics
Keeping an eye on key metrics can help you identify and deal with small issues before they become bigger problems.
Consider monitoring:
How long you typically take to pay suppliers
What percentage of your invoices get paid late
How much of your available trade credit you’re using
Whether you're missing out on discount opportunities
Protect supplier relationships if times get tough
Most businesses experience times of hardship and suppliers know this. Get in touch with your supplier immediately and be honest if you’re having problems. They’ll be more willing to be flexible if you highlight potential issues early, and you can show good-will by offering partial payments or updated payment schedules.
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How trade credit works
Typical terms
Suppliers offering trade credit usually set payment terms of 30, 60 or 90 days. Some may provide a discount if you pay them earlier (eg 2% off if paid within 10 days).
Parties involved
There are usually just two parties involved in a trade credit agreement – a business (the buyer) and a supplier (the lender). A director may also need to provide a personal guarantee for very new businesses.
Industry examples
Different sectors use different terms to match their cash flow needs. For example, retail businesses often use 60-90 day terms, manufacturing typically uses 30-60 days, and hospitality can use 14-30 day terms.
How to apply for trade credit
Your success will depend on demonstrating reliability and creditworthiness.
Meeting eligibility criteria
A supplier will want to know your business is financially stable and reliable. So they may ask about your financial stability, previous payment record and general creditworthiness.
If your business is established with a steady revenue stream, you’ll likely qualify for standard terms. But you’ll typically get better deals as your business and supplier relationship grow.
Documentation you might need
You won’t have to do as much paperwork as many other types of business finance require. But you’ll typically be asked to provide:
Business registration documents
Recent financial statements
Bank and supplier references
Director information (including a personal credit check)
How to build creditworthiness as a new business
If your business is new or has a limited trading history, you’ll need to do more to prove your reliability.
Here are some ways to help build your creditworthiness:
Set up your business credit profiles
Establish profiles with one or more Credit Reference Agencies so lenders and suppliers can find your business.
Monitor your score with Credit Score Insights
Tide’s Credit Score Insights is an affordable subscription that gives you access to your business credit score and highlights factors that may be influencing it.
Work with suppliers who understand your industry
Building a reputation for prompt payments in your sector shows that you’re dependable.
Maximise your existing relationships
Ask current suppliers or service providers for smaller credit terms to help demonstrate regular, on-time repayments.
Show secured contracts or orders
Evidence of ongoing contracts or large orders proves you have predictable revenue to support credit obligations.
Consider group credit arrangements
If you’re part of a franchise or larger organisation, leveraging group purchasing power or joint guarantees can improve terms.
Different types of working-capital
Invoice finance
Borrow up to 70-95% (typically) of the value of your unpaid customer invoices in return for paying ongoing fees. Invoice finance can be helpful if you have longer customer payment terms, but trade credit may be more suitable if your supplier’s terms align well with your expected cash flow.
Merchant cash advance
Receive immediate funds, and pay back a percentage of future credit and debit card transactions (often at expensive rates of over 50% per year if you repay quickly).
Merchant cash advance may be suitable if you want to invest without the rigidity of fixed payments, but trade credit is often the more affordable option if you can get it.
Short-term business loans
Get the cash you need when you need it, if you’re willing to go through a formal application process and pay interest on what you borrow.
Short-term business loans can work well for unexpected opportunities or needs, but trade credit may be more suitable for regular purchases.
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.