What’s a trade credit?

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Trade receivables are open accounts extended to a customer by a supplier. Trade credit allows customers to place orders and receive goods and services without the need to pay up front. More than one model of open account arrangements is used today, ranging from revolving credit to simple invoicing with specific payment terms.

The most common model for trade credit is the acceptance and delivery of a sales order accompanied by an invoice. The invoice set out the payment terms that the customer should accept. Typically, a customer will have fifteen to forty-five calendar days from the invoice date to make full payment. If payment is not made on time, the vendor may choose to add additional charges to the account or temporarily suspend credit privileges for the customer.

Sellers can also choose to establish a revolving line of credit for a customer. In this scenario, the vendor sets a credit limit based on the customer’s credit rating. The customer is free to use 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 principal balance.

Establishing commercial 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 make the business more attractive to lenders such as banks or private investors. Keeping up with your trade receivable payments paves the way for such financial assistance as establishing bank credit lines, obtaining business loans, or receiving favorable interest rates on mortgages for a business site.

Commercial credit is also extended to individuals. In the broadest sense, whenever goods and services are delivered and invoiced for payment at a later date, the consumer receives the benefit of trade credit. As long as payments are made on terms, trade credit can be an excellent way to help establish or rebuild a strong credit rating.

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