Trade Credit

Trade credit 101: What is trade credit and why do you need to offer it?


Trade credit has been at the cornerstone of the economy for as long as trade between businesses has existed – that’s a long time! But exactly what is trade credit in business terms? And why is it so essential for modern B2B commerce?

According to the World Trade Organisation, around 80-90% of world trade relies on trade finance (which includes trade credit, factoring and insurance/guarantees), and a report from Atradius revealed that as much as 60% of B2B sales in the UK are made via trade credit.

Ongoing economic impacts of the pandemic have resulted in a dramatic spike in the adoption of trade credit, with many B2B merchants and marketplaces offering credit terms to attract buyers and generate more sales. According to data gathered by Hokodo, 45% of businesses occasionally have to grant their buyers payment terms in order to win deals, while 14% have to do this all the time.

Meanwhile, 43% of businesses have reported a 30% increase in the total value of sales made on credit terms since the onset of the coronavirus pandemic.

Clearly, trade credit is a key tool for driving revenue and winning new business in B2B, but for many sellers it is still something of a mystery. In this guide, we take it back to basics and tell you everything you need to know about offering trade credit to your business customers.

Here’s what we’ll be covering:

  • What is trade credit?
  • The different types of trade credit
  • Advantages and disadvantages of trade credit
  • Managing the risks of trade credit
  • The latest trends in trade credit
  • Alternatives to trade credit
  • Why you need to offer trade credit
  • B2B BNPL: The modern way to offer trade credit 

‍What is trade credit?

In a nutshell, trade credit is a B2B arrangement that allows business customers to purchase and receive stock, materials, equipment or services whilst delaying payment. In other words, we define trade credit as a form of inter-company lending or, put simply, the business version of “buy now, pay later”. 

Many of your customers will struggle with cash flow at some point or another and could find themselves in a difficult position when it comes to paying for their purchases. Solutions such as credit cards can come in handy, but they usually come with restrictive credit limits, high interest rates and accounting headaches most of us can do without.

With trade credit, you are offering your customers short-term, interest-free financing to buy the goods they need. You grant your customers 30, 60, or 90-day payment terms, or occasionally flexible instalments, and they get the goods or services needed to run their business without having to hand over any funds upfront. This can be especially helpful for customers who need time to sell on the goods that you’ve supplied since they can then use the income to pay you.

Trade credit: what does it look like?

The trade credit process can be broken down into a few simple steps:

  1. A B2B sale is completed. The buyer does not make any upfront payment and agrees to the payment terms.
  2. The seller packages and ships the order.
  3. The buyer receives their order, along with an invoice stating the payment terms.
  4. When the payment due date arrives, the seller collects payment.
A timeline showing the trade credit process.

Is trade credit a short term source of finance?

Usually, trade credit terms require the buyer to make repayment in 30, 60 or 90 days, although sometimes you may find suppliers offering shorter or longer terms. However, in comparison to some other forms of lending, trade credit is considered a short term source of finance.

The different types of trade credit

Broadly speaking, trade credit refers to the practice of buying goods or services now and paying for them later, typically within a specified period of time. There are several common types of trade credit detailed below, however the specific terms and arrangements may vary depending on agreements between the buyer and supplier. 

Open account

This is the most basic and commonly used form of trade credit. The supplier allows the buyer to purchase goods or services without any immediate payment. Upon delivery, the buyer receives an invoice and is expected to pay within a specified period, such as 30, 60 or 90 days.

Cash-on-delivery (CoD)

In this type of trade credit, the buyer pays for the goods or services at the time of delivery. The supplier receives payment sooner than in the case of open account credit, reducing the risk of non-payment. However, the buyer doesn’t get the chance to start making profits before they must pay.

Instalment credit

The buyer agrees to make regular payments over a specific period. The supplier may request an initial down payment and then divide the remaining sum into equal parts to be paid in accordance with an agreed schedule.

Revolving credit

This type of credit works in a similar way to a credit card. The supplier assigns a maximum credit limit to the buyer, who can make purchases up to that limit. The buyer must make periodic payments – for example, every month – and as they do, the credit becomes available again.


In a consignment arrangement, the supplier delivers goods to the buyer but retains ownership until the goods are sold. The buyer pays the supplier only for the goods that have been sold, reducing the risk for the buyer.

Trade acceptance

In some cases, the supplier may draw up a bill of exchange, known as a trade acceptance, which requires the buyer to make payment at a future date. The buyer accepts the bill and commits to paying the amount when it becomes due.

Advantages and disadvantages of trade credit

If helping your customers stay out of the red is not enough to leave you feeling warm and fuzzy inside, you also get to reap a range of trade credit benefits when you offer it to buyers. However, there are also a number of risks which you’ll need to consider. Find out about the pros and cons of trade credit below.

Trade credit advantages

‍‍‍Offering your customers the opportunity to buy now, pay later can lead to a lengthy, mutually beneficial and profitable relationship. Below are just some of the benefits.

1. It’s a great way to encourage sales 

Two thirds (65%) of businesses offering trade credit use it as a strategy to stimulate sales. Giving your customers the option to pay on credit terms ensures their cash flow is not disrupted and increases their profitability. What does this mean for you? It promotes recurring purchases and encourages buyers to spend more, resulting in an increase in revenues and average order values.

2. It helps you win new customers

Let’s face it, buyers like trade credit and the current tough economic climate only increases its attractiveness. Offering trade credit also sets you apart from the competition and lowers your customer acquisition costs. All else being equal, if you’re selling the same product as a direct competitor, you increase your chances of winning the deal if you offer favourable payment terms. 24% of respondents in this Atradius survey said the main reason they grant credit is to remain competitive.

3. It boosts customer loyalty

By demonstrating to your buyers that you trust them to pay later, you will encourage their loyalty to you as a supplier. Additionally, offering your customers convenient and flexible payment options is key to providing them with a better purchasing experience, meaning they are more likely to spend with you instead of your competitors.

Trade credit disadvantages

Offering trade credit to your business customers doesn’t come without its risks and challenges. Trade credit management solutions designed to mitigate risks are available, but you’ll need to know what you're getting into first. Here’s what you’ll need to keep in mind.

1. Cash flow and financing

Perhaps the most obvious risks of offering trade credit stem from not getting paid immediately.

As we mentioned earlier, by offering credit you’re essentially financing your customers. The money has to come from somewhere, and financing this off the back of your own balance sheet can leave a hole in your cash flow if you’re not too careful. 

Thankfully there are a number of ways you can finance your debtor book, you could consider:

  • Getting credit from your bank
  • Engaging an invoice factoring company
  • Partnering with a B2B Buy Now, Pay Later provider like Hokodo

2. Understanding your customers’ creditworthiness

Any merchant or marketplace that decides to offer trade credit will need to run eligibility checks to find out if their customers are creditworthy. After all, extending credit is an act of trust. If your customers have a history of late payments or find themselves in poor financial health, you’ll need to know so you can make lending decisions accordingly. 

Credit checking is a costly and time-consuming exercise. At a minimum, you’ll need to get access to credit history reports from the likes of Experian or Creditsafe, or use our Hokoscore tool, to inform your lending decisions.

3. Late payments 

The reality is, businesses don’t always pay on time. What’s more is that the economic impact of the pandemic has increased the number of businesses making late payments. It’s reported that 47% of the total value of invoices are paid late. As it stands, over £23.4 billion is owed in outstanding invoices to UK businesses. 

Fortunately, credit checking your customers will weed out a large chunk of late payers. Some B2B merchants incentivise early payments by offering discounts to buyers that pay ahead of schedule. Whatever you choose to do, ensure you have an effective accounts receivable process to nip those overdue payments in the bud.

4. Non-payment

No matter what you do to protect your business against risk, there will be clients who default on their payment. Unlike late payments that are eventually settled, unpaid invoices can be more challenging to handle – the customer may have gone out of business, or maybe they just can’t afford to pay. Either way, you’re left holding the bag (without the money inside!).

In this case, a trade credit insurance policy could protect you against the risk of bad debt.

5. Operational complexity

While operational complexity overlaps with some of the points above, we think it deserves its own headline. Why? Because giving your customers the option to pay on credit has the potential to be an operational nightmare. You’ll need to ensure that you have the right resources and processes in place to measure credit risk, handle invoicing and chase payments, detect any fraud, reconcile cash and so on. That often means a lot of time, money and resources which might be better spent elsewhere. 

Fortunately, we have developed a B2B Buy Now, Pay Later solution that streamlines the whole process of offering trade credit to your online customers – but more on that later.

‍Managing the risks of trade credit

Managing the risks associated with trade credit is crucial for protecting your cash flow and financial stability. Below are seven strategies for effectively managing trade credit risks.

1. Evaluate the creditworthiness of customers

Thoroughly assess the creditworthiness of customers before offering them credit. Obtain credit reports, review financial statements and consider their payment history with other suppliers. This information will help you determine the level of risk involved in granting credit to them.

2. Set credit limits

Establish credit limits for each customer based on their financial strength and payment history. Ensure that the credit limits are appropriate to minimise the risk of potential late payments or non-payments.

3. Implement a credit policy

Develop and enforce a clear credit policy that outlines the terms and conditions of trade credit. Clearly communicate this policy to your customers, including information on payment terms, penalties for late payments, and consequences of non-payment.

4. Use credit insurance

You could obtain credit insurance to protect against non-payment. Credit insurance provides coverage in case of customer insolvency, default or other unforeseen circumstances. It helps mitigate the risk associated with trade credit and provides financial protection.

5. Monitor and analyse customer payment behaviour

Regularly monitor customer payment patterns and behaviour. Track any delays or defaults in payments and promptly follow up with customers to resolve issues. Identify trends or warning signs of potential financial difficulties that could impact their ability to pay.

6. Diversify your customer base

Relying heavily on a small number of customers for the majority of your revenue increases the risk of financial loss if one of them defaults. Aim to diversify your customer base to distribute the risk and avoid overexposure to a single customer.

7. Regularly review and update credit policies

Periodically review and update your credit policies. Adjust credit limits, terms and conditions as necessary to adapt to changing market conditions, customer behaviour and business goals.

The latest trends in trade credit

Driven by digitalisation, a number of trends reflect the ongoing evolution of trade credit management practices with a focus on optimising working capital and mitigating credit risks.


In recent years, digital transformation has had a significant impact on trade credit processes. Increasingly, businesses are leveraging digital platforms and technologies for trade credit management, such as online credit applications, automated credit scoring, electronic invoicing, and digital payment systems. They may even opt to work with a partner who brings all this under one roof. This trend of the consumerisation of B2B enhances efficiency, reduces paperwork, minimises risk and improves the overall customer experience.

Alternative financing solutions

Although traditional trade credit is still popular among buyers and sellers, businesses are also exploring alternative financing options to support their trade activities. Crowdfunding, peer-to-peer lending, invoice financing and supply chain financing platforms are emerging as viable alternatives, providing businesses with additional sources of working capital. The Small and Medium Sized Business (Credit Information) Regulations 2015 enables alternative lenders to compete with incumbent banks when it comes to offering finance to SMEs.

Data-driven credit assessments

Availability of vast amounts of data and analytics developments have enabled businesses to adopt more sophisticated credit assessment models. By leveraging data analytics, artificial intelligence and machine learning algorithms, businesses can analyse extensive datasets to make a far more accurate assessment of creditworthiness. This trend allows for faster and more accurate credit decisions while reducing the risk of defaults.

Trade credit insurance

Trade credit insurance has gained prominence as a risk management tool. It provides protection against non-payment by customers due to insolvency, default or other specified risks. With increased uncertainty, businesses are turning to trade credit insurance to safeguard their receivables and mitigate credit risks.

Integrated credit management systems

Integrated credit management systems that include a combination of the different elements of trade credit are becoming more prevalent. They may include credit scoring, fraud checks, credit monitoring, financing, payments processing and/or collections. These systems provide businesses with end-to-end solutions for managing trade credit risks, streamlining processes and enhancing efficiency in credit management.

Collaboration and data sharing

Collaborative platforms and networks are emerging, allowing businesses to share trade credit information and collaborate on credit risk assessment. By sharing data on customer payment behaviour and creditworthiness, businesses can make more informed credit decisions and reduce the risk of non-payment.

Alternatives to trade credit

There are several alternatives to trade credit that businesses can consider for their financing needs. Each alternative has its advantages and drawbacks that must be considered. Businesses should carefully assess their financing needs, risk tolerance and long-term goals to determine the most suitable financing option or combination of options. Consulting with financial advisors or professionals can provide further guidance in selecting the appropriate alternatives to trade credit.

Bank loans

Businesses can seek financing from banks and financial institutions through various types of loans, such as term loans, lines of credit or asset-based loans. These loans provide upfront capital that can be used for various purposes, including purchasing inventory or financing business operations.

The primary difference between a loan and trade credit is that banks offering business loans have high barriers to entry, with lots of time consuming paperwork and checks required. The loan may have high interest rates or be secured against an asset. Meanwhile trade credit is provided by suppliers to their customers at the point of need without any exchange of collateral or interest rates.

Equity financing

Instead of relying on debt, businesses can raise capital by selling equity in the company. This can be done through private equity investments, venture capital funding or even crowdfunding platforms. Equity financing involves selling ownership stakes in the business in exchange for capital.

Trade finance

Trade finance refers to financing solutions designed specifically for international trade transactions. It includes products such as letters of credit, bank guarantees, export/import financing and invoice factoring. These instruments provide businesses with access to working capital and mitigate the risks associated with cross-border trade.

Invoice factoring

One of the most popular ways for B2B firms to get paid quickly is with invoice factoring. This is where a third party, such as a bank or financial service provider, will quickly pay you 80-90% of the invoice amount upfront, and then collect it from the buyer when the payment terms expire. This alternative provides businesses with quick access to working capital while transferring the collection risk to the financing provider.

Supply chain finance

Supply chain financing is quite similar to invoice factoring, but it’s the other way around. Instead of the merchant seeking to be paid early on their invoice, the buyer will obtain financing so their supplier can get paid in advance while they themselves will pay later. That’s why this type of business lending is often called “reverse factoring”. 

B2B Buy Now, Pay Later

This type of finance is much like the embedded lending facility that has become a staple in consumer commerce in recent years. With B2B Buy Now, Pay Later, suppliers get paid at the point of purchase by a lender, while the buyer can take 30, 60 or 90 days to pay.

You can learn more about the many trade credit alternatives available to businesses in our ultimate guide to B2B financing options.

Why you need to offer trade credit

73% of B2B buyers are millennials who prefer to buy online. Having grown up during the age of Amazon, ASOS and slick consumer e-commerce, they have high expectations of how online trade should look and feel. If these buyers want to pay on credit terms – which they often do – they’re expecting an instant, frictionless experience comparable to Klarna; not a 4-page form and a 3-day wait.

Meanwhile, 97% of all business buyers say they will make a purchase in an end-to-end, digital self-serve model, with the vast majority comfortable spending $50,000 or more online. If you don’t have the right payment options integrated into your online checkout, you’re effectively handing these transactions over to the competition.

As you can see, offering seamless trade credit is no longer a nice-to-have but an absolute essential in B2B commerce, offline and online. Hokodo can help your business to make it a reality.

B2B BNPL: The modern way to offer trade credit online

Extending trade credit to your customers can benefit your business by having a direct impact on key metrics like conversion rate, average order value and purchase frequency. Your current customers will keep coming back to spend more, and you’ll gain some new ones along the way. 

Hokodo’s B2B Buy Now, Pay Later solution can help merchants and marketplaces provide their customers with transparent and flexible payment terms, without having to take on any of the risk (or faff) of traditional trade credit management.

Our end-to-end solution simplifies and streamlines the whole process; we take on the risk and hassle of credit and fraud checks, chasing unpaid invoices, financing transactions, collecting payments and insuring against non-payment. You get paid instantly, leaving more time, cash and resources to focus on what matters the most – the growth and success of your business.

Next steps: Taking advantage of B2B BNPL 

There’s no time like the present! If a B2B Buy Now, Pay Later solution sounds like it might be right for your business, book a call with one of our experts today to discuss your current payments setup and see how you can start growing your business with online payment terms.

You can also check out our comprehensive guide on how to choose a B2B BNPL provider.

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