Here is the definition: an agreement between two B2B companies, where a supplier of goods or services accepts a deferred payment from its client.
This agreement does not cost your customer anything: they do not pay any fees or interest.
A trade credit agreement is a sort of 0%-loan – referred to as a “commercial loan” – that you grant your customer when invoicing a product.
When making this agreement, you need to define invoice payment terms to provide details about the expected payment and specify how much time your customer has to pay.
The deferments granted generally range from one week to three months, and are counted in number of days (7, 10, 30, 60...).
At times, you may set up a discount to your customer in case of early payment.
Example. A client is granted a trade credit with terms of “5/10 net 30”: if payment is made within 10 days, the client is offered a 5% discount. If not, the full amount is due within 30 days.
Conversely, penalties for failure to meet payment deadlines can be set against a bad payer, usually through interests (around 8-10%) on the outstanding debt owed from the day after the due date of your contract. In certain cases, you can also ask to get compensation for costs.
In many countries like in the European Union, such penalties are statutory and benefit from a regulatory framework. You should check the laws that apply to your contract before setting your payment terms.
Trade credit can also help companies to finance their current operations, especially during certain periods of high activity (for example a retailer as the holidays draw near). It’s also very useful for new businesses or startups which don’t have yet access to bank loans or sufficient fundraising.
On paper, trade credit looks like free money to the client. However, failure to meet payment schedules can result in major penalties according to the negotiated terms as well as damage the client's reputation and its relationship with the supplier.
You should always check your client’s credit history or run customer credit checks before contracting with a new client.
The advantages mentioned above are crucial for certain industries, notably those with strong inventory costs and challenges – for example distribution or construction: trade credit helps the client finance its inventory with its working capital.
All sizes of business can benefit from it, although mid-sized companies are best positioned to benefit from the advantages of trade credit: they have greater bargaining power than SMEs, but fewer financing options than large companies.
On your side of things, trade credit has multiple advantages: it is an effective way for you to win new contracts, increase your business volume and build loyalty among your clients.
Another solution is . It provides you with predictive protection and compensation in the event of a . Concretely, it means that if a client doesn’t pay you on time, the insurer will reimburse a percentage of the outstanding credit. This type of coverage is very flexible and can cover all or part of your client portfolio.
In conclusion, trade credit is a powerful for you to accelerate your commercial development and improve your customer relations, with limited risk if properly controlled. Solutions like trade credit insurance prove very useful and efficient for managing trade receivables and taking full advantage of the benefits of trade credit.