What is Trade Credit?

Trade credit is a form of credit that is used by businesses to maximize cash flow. The business owner fills out a credit application with a supplier or vendor. If the application is approved, a line of credit is established. The supplier will usually leave the trade credit account open if the payments are made in a timely manner.

Benefits

When a business is in it's early stages of operation, trade credit can allow the business owner to reduce their cash outlay amount by purchasing inventory before actually having to pay for it. Once the inventory is sold, the amount owed by the business is then paid back to the supplier. In most cases there is a set amount of time the business owner has to pay back the amount, usually between ten to thirty days.

A supplier will usually give a discount to a business for paying off the trade credit early. The terms of the discount are disclosed in the trade credit agreement. By paying early, the business will further increase their profit margin, that is, if they sold the inventory for more than the amount they paid for it.