Trade Credit

Trade credit is the arrangement under which a supplier ships product or performs services today and agrees to be paid later, typically 30 to 90 days after invoice. It is the single largest source of short-term business financing in the United States, larger than bank lending for many mid-market companies, yet it is extended by credit departments rather than banks and is almost always unsecured.

For the seller, trade credit is a competitive necessity and a risk position at the same time. Offering net terms wins orders that cash-in-advance competitors lose, but every open invoice is an interest-free loan funded by the seller's own working capital. The credit department's job is to price that risk operationally: decide who gets terms, how much exposure to allow, and how quickly to intervene when payment behavior deteriorates.

Unlike consumer credit, trade credit in the US is lightly regulated. There is no equivalent of the FCRA governing most commercial credit decisions, terms are negotiated rather than standardized, and the primary protections a seller has are its credit policy, its documentation (credit application, guarantees, security instruments), and its collection discipline. That makes internal process quality the main determinant of loss rates.

What the seller finances is the gap between paying for goods and being paid for them. A distributor holding 45 days of inventory, paying its own suppliers on net 30 and selling on net 30, is funding roughly 45 days of working capital on every turn. That is why a credit limit is a cash decision as much as a risk decision: the limit granted is working capital committed, and it competes with every other use of that cash in the business.