Trade credit: meaning, examples, advantages, cost and how to offer it
Trade credit is when a supplier lets a business customer take goods or services now and pay later — typically 30, 60 or 90 days after the invoice — without interest. For the buyer it is a short-term source of financing recorded as accounts payable; for the supplier it is a sale on account recorded as accounts receivable. A hardware wholesaler that delivers $2,400 of materials to a roofing contractor on Net 30 terms is giving trade credit. Below: examples, advantages and disadvantages for both sides, what trade credit really costs when there is an early-payment discount, how it compares with a bank loan or credit card, how to set a credit limit, and how to keep track of every customer you give credit to — including in Account Ledger by Ofisx.
Short answer
- Trade credit meaning: a supplier's agreement to let a business buyer pay for goods or services later, usually within 30–90 days, without interest.
- Example: a café receives $620 of coffee beans on Oct 28, 2026 on Net 30 terms and pays by Nov 27, 2026.
- Short or long term? Short-term financing — it is repaid within months and sits in current liabilities (accounts payable) for the buyer.
- Internal or external finance? External: the money effectively comes from the supplier, not from the business's own funds.
- Main advantage: buy stock now and pay from the sales it generates. Main disadvantage: late payment damages the supplier relationship, and skipping an early-payment discount can be very expensive.
- Not the same as store "trade credit" for trading in games or devices — that is a retail gift-balance, not business financing.
Trade credit examples
| Supplier → buyer | What is supplied | Terms | Buyer records | Supplier records |
|---|---|---|---|---|
| Hardware wholesaler → roofing contractor | $2,400 of materials | Net 30 | Accounts payable $2,400 | Accounts receivable $2,400 |
| Coffee roaster → café | $620 of beans | Net 30 | Accounts payable $620 | Accounts receivable $620 |
| Food distributor → deli | $1,150 weekly deliveries | Net 15, statement monthly | Accounts payable, settled per statement | Customer ledger with a running balance |
| Packaging supplier → online shop | $5,000 of boxes | 2/10 Net 30 | Pays $4,900 by day 10 or $5,000 by day 30 | Receivable; discount recorded if taken |
| Printing company → event organizer | $3,000 print job | 50% upfront, balance Net 30 | Payable of $1,500 after delivery | Receivable of $1,500 |
Common forms of trade credit: open account (goods delivered, invoice sent, buyer pays by the due date — by far the most common), promissory note or trade acceptance (the buyer signs a written promise to pay on a date), and installment terms for larger orders. For the terms themselves, see Net 30 payment terms.
Advantages and disadvantages of trade credit
| For the buyer | For the supplier | |
|---|---|---|
| Advantages | Stock now, pay from sales later; usually no interest; no bank application or collateral; builds a payment track record with the supplier | Wins and keeps business customers who expect terms; larger and more frequent orders; a competitive edge over cash-only suppliers |
| Disadvantages | Missing an early-payment discount is costly; late payment can mean holds, cash-only terms or late fees; easy to over-order | Your cash is tied up for 30–90 days; risk of late payment and bad debt; time spent on reminders and statements |
For a small supplier the biggest disadvantage is the cash gap: if you pay your own suppliers in 15 days but give customers 30, you finance the difference. Keep an eye on both sides — accounts receivable and accounts payable.
The cost of trade credit (formula and examples)
Trade credit is interest-free only if there is no early-payment discount. If the supplier offers one, not taking it has a cost. The usual approximation:
Cost of trade credit = discount % ÷ (100% − discount %) × 365 ÷ (full payment days − discount days)
| Terms | Calculation | Approximate annual cost of skipping the discount |
|---|---|---|
| Net 30 (no discount) | — | 0% — free credit for 30 days |
| 1/10 Net 30 | 1/99 × 365/20 | ≈ 18.4% |
| 2/10 Net 30 | 2/98 × 365/20 | ≈ 37.2% |
| 2/10 Net 60 | 2/98 × 365/50 | ≈ 14.9% |
Reading the table: on 2/10 Net 30, paying on day 30 instead of day 10 is like borrowing for 20 days at about 37% a year. If a bank line costs less than that, borrowing to take the discount is usually cheaper. In Excel, with the discount in B1 (e.g. 2%), discount days in B2 and net days in B3: `=B1/(1-B1)*365/(B3-B2)`.
Trade credit vs bank loan vs business credit card
| Trade credit | Bank loan / line of credit | Business credit card | |
|---|---|---|---|
| Who gives it | Your supplier | A bank or lender | A card issuer |
| Typical term | 15–90 days | Months to years | Grace period, then revolving |
| Interest | Usually none (unless you miss a discount or pay late) | Yes | Yes, after the grace period |
| Paperwork | Credit application, sometimes references | Application, financial statements, often collateral | Application and credit check |
| Use | Only with that supplier | Any purpose | Anywhere cards are accepted |
How to offer trade credit to your customers
If you are the supplier, a few rules decided in advance keep trade credit from turning into a collection problem:
- Use a one-page credit application: legal business name, address, owner or accounts-payable contact, phone and email, years in business, two trade references, requested limit, and a signature accepting your terms.
- Set a credit limit: start small (for example one or two typical orders, such as $2,000) and raise it after a few on-time payments.
- Write the terms on every invoice: terms and the actual due date, e.g. "Net 30 — due November 20, 2026".
- Record every sale on account and every payment against the customer so you always know the running balance.
- Review weekly: who is close to their limit, who is past due, who should get a payment reminder.
- Have a hold rule: for example, new orders on account stop when an invoice is 15 days past due or the balance exceeds the limit.
- Send a statement monthly to customers who buy often — a statement of account settles disputes early.
Larger suppliers also use trade credit insurance or credit reports on new customers; for a small business with a handful of accounts, a limit, written terms and a weekly look at balances do most of the work.
Example: tracking trade credit customers against their limits
A supplier's weekly view on November 23, 2026:
| Customer | Credit limit | Balance | Oldest unpaid due date | Action |
|---|---|---|---|---|
| Mason Roofing | $5,000.00 | $4,200.00 | Nov 20, 2026 (3 days late) | Remind; next order would exceed the limit |
| Harbor Café | $1,500.00 | $620.00 | Nov 27, 2026 | OK |
| Pine Street Deli | $2,000.00 | $1,150.00 | Dec 4, 2026 | OK |
The balance per customer, not the single invoice, is what tells you whether to ship the next order on credit. That is exactly what a client ledger is for.
Ways to track trade credit customers compared
| Option | Best for | Balance per customer | Due dates and reminders | Platforms | US App Store ratings (Oct 21, 2026) |
|---|---|---|---|---|---|
| Account Ledger by Ofisx | Small suppliers giving trade credit to regular customers | Running balance per customer and per supplier | Due date on each sale on account; alerts for upcoming and overdue amounts; WhatsApp balance reminder sent by you | iPhone (US App Store); Android on Google Play in Turkey only | New in the US store — no ratings yet |
| Intuit QuickBooks | Businesses that invoice every sale in QuickBooks | Customer balances and A/R aging | Payment terms on invoices; email reminders | iPhone, Android, web | 273,010 ratings, 4.7 |
| Zoho Books | Small businesses invoicing in Zoho | Customer balances and aging | Payment terms on invoices; reminders; statements | iPhone, Android, web | 5,264 ratings, 4.8 |
| Wave | Very small businesses that invoice in Wave | Customer balances from Wave invoices | Due dates on invoices; overdue reminders | iPhone, Android, web | 6,665 ratings, 4.4 |
| Spreadsheet | A few credit customers | SUMIFS per customer | Due date column and a filter | Any | — |
The options in detail
Account Ledger by Ofisx
Account Ledger keeps a ledger for each customer and supplier — sales and purchases on credit with a due date, payments, partial payments and returns — and shows each running balance. Due-date alerts flag what is coming due or overdue; from the customer's card you can send the balance by WhatsApp or share the ledger as a PDF statement.
It does not issue invoices, check business credit reports or calculate early-payment discounts. A credit limit is not a built-in field we can confirm — keep the agreed limit in the customer's note and compare it with the balance.
Intuit QuickBooks
QuickBooks manages payment terms, customer balances and receivables inside full accounting.
Zoho Books
Zoho Books supports payment terms, reminders and customer statements in full accounting.
Wave
Wave combines invoicing and bookkeeping for very small businesses.
Spreadsheet
A sheet with customer, limit, sales, payments and due dates works for a few accounts; it gets fragile with partial payments and several people editing.
How to give trade credit safely
- Decide the limit before the first delivery — A limit agreed up front is easy to enforce; one invented after a late payment feels personal.
- Put terms and due dates in writing — On the credit application, the quote and every invoice.
- Know each customer's running balance — Check it before you ship the next order on credit.
- Price the discount carefully — 2/10 Net 30 costs you about 37% a year in annual terms — offer it only when you really need faster cash.
- Match your supplier terms — Do not give customers longer terms than your own suppliers give you unless you have the cash to bridge it.
- Act early on late accounts — A reminder and a hold on new credit at 15 days late prevent most bad debts.
Limits — what Account Ledger does not do
- Account Ledger does not issue invoices, run credit checks or calculate early-payment discounts.
- It does not send automatic email reminder sequences or take card payments; you send the WhatsApp reminder from the customer's card.
- In the US the app is on the App Store for iPhone; the Android version is on Google Play in Turkey only for now.
- It is a paid subscription after the free trial; the App Store shows current plans and prices.
Frequently asked questions
What is trade credit?
Trade credit is an arrangement where a supplier lets a business customer receive goods or services now and pay later, usually within 30 to 90 days and without interest. The buyer records it as accounts payable and the supplier as accounts receivable.
What is an example of trade credit?
A hardware wholesaler delivers $2,400 of materials to a roofing contractor on October 21, 2026 on Net 30 terms; the contractor pays by November 20, 2026.
Is trade credit short-term or long-term finance?
Short-term. It is usually repaid within 30 to 90 days and appears in current liabilities as accounts payable on the buyer's balance sheet.
Is trade credit an internal or external source of finance?
External. The financing comes from the supplier, who waits for payment, rather than from the business's own retained profits or owner funds.
What are the advantages and disadvantages of trade credit?
For the buyer: stock now, pay later, usually without interest or a bank application — but late payment damages the relationship and skipping an early-payment discount is expensive. For the supplier: more and larger orders from loyal customers — but cash is tied up and some customers pay late or not at all.
How do you calculate the cost of trade credit?
Discount % ÷ (100% − discount %) × 365 ÷ (full payment days − discount days). For 2/10 Net 30: 2/98 × 365/20 ≈ 37.2% a year.
How do I set a trade credit limit for a customer?
Start with one or two typical orders' worth, based on the credit application and references, and raise the limit after several on-time payments. Compare the customer's running balance with the limit before each new sale on credit.
How do small suppliers keep track of trade credit?
Record every sale on account, due date and payment against each customer and check balances weekly. Accounting apps such as QuickBooks, Zoho Books and Wave do this for invoices issued in them; Account Ledger by Ofisx keeps a running-balance ledger per customer and supplier with due-date alerts on iPhone, with a free trial and then a subscription.