How to Use Short-Term Financing to Purchase via Trade Credit

See whether trade credit makes sense for your business.

Trade credit can be a relatively easy, effective, and low-cost way to secure small business financing, even for startups and new businesses. However, most entrepreneurs don’t understand it or how it works. 

This article explains what you need to know to determine whether it makes sense to use this form of financing.

The basics

Trade credit, often referred to as vendor credit, is a form of short-term financing that your business may be able to get from suppliers and service providers without having to apply through traditional financial institutions. These short-term credit arrangements let your company buy now and pay for goods or services at a later date. In short, any time your business accepts delivery of goods, supplies, or services without making an immediate payment, it’s leveraging trade credit.

Depending on the vendor, trade credit interest costs are often very low, or no interest is charged at all. Vendors do this to encourage companies to bring in new customers and promote customer loyalty. It’s a perk of doing business with them.

However, be aware that This form of financing may include hidden costs, such as late payment penalties, that can add up over time. There is also the possibility that early payments under a trade credit agreement could earn you discounts. Paying early could also boost your credit score, a big plus for entrepreneurs launching startups.

Using it right

Trade credit is used by many businesses that purchase all types of goods, supplies, and services. Business-to-business (B2B) companies in many industries, including construction, fashion, and food distribution operations offer trade credit. You may be able to get essential items and services for your business by leveraging payment terms through trade financing. It’s a popular type of financing because it provides greater liquidity to businesses at low – or even no – cost.


Trade credit can take many forms, based on when you agree to pay a vendor for the things or services they supply. The different timings are referred to as trade credit terms.

The most common type of trade credit is net-30. If your vendor offers net-30 terms, it means you have to pay in full for products or services within 30 days of receipt of the invoice.

In addition to Net-30, other trade credit terms include:

  • Net-15: Payment is due within 15 days of the invoice date.
  • Net-45: Payment is due within 45 days of the invoice date.
  • Net-60: Payment is due within 60 days of the invoice date.
  • Net-90: Payment is due within 90 days of the invoice date.
  • Net-120: Payment is due within 120 days of the invoice date.

Hidden costs

Most vendors do not charge interest on trade finance agreements. If they do, it’s a minimal amount. However, don’t conclude that trade credit is always free or extremely low-cost financing. There are often hidden costs associated with this type of short-term credit. Here are some examples:

  • Forgoing a discount. Many vendors offer their customers a cash discount, often referred to as a trade discount, for paying cash on — or shortly after — delivery of goods and services. When you leverage trade credit, you decide to not take advantage of discounts for paying cash. In this case, using trade credit costs you because you’re not enjoying the benefits of the early payment discount. For example, a vendor offers trade discount terms of 5/10 net-30. The first number is the discount percentage, and the second is the discount qualification period. In this example, you earn a five percent cash discount if you pay within ten days of being invoiced. You also have the option to wait 30 days from invoicing to pay your bill, forgoing the discount but not paying interest on the amount due. This part of the deal is the trade credit.
  • Late payment fees. Late payments on vendor accounts are often costly. Late payment penalties vary from supplier to supplier. They can rise to 15 percent or more. Always check invoices and contracts to see if they include late payment penalties. If you’re not sure, contact the vendor. Even if late fees are minimal, it’s always a good idea to pay your bills on time. Frustrated vendors might report your account to commercial credit bureaus, which could harm your business credit score.

Steps to take before applying

Running a successful business for several years improves your chances of getting approved when you’re ready to apply for vendor accounts or other business financing. It will also help you secure higher credit limits, lower interest rates, and better credit terms.

Trade credit is typically easier to qualify for than other types of business financing. Still, vendors are concerned about risk. They don’t want to provide credit terms to operations that won’t be able to pay for the goods and services they deliver. They want to avoid bad debt at any cost.

Here are five things you can do to make it more likely your business will be approved for vendor credit.

  • Set up a separate business entity. Creating a corporation or LLC will separate your business and personal credit profiles, protecting your personal finances if you’re sued for business reasons or are unable to pay back business debt. It will also improve your odds of getting approved when you apply for vendor credit and other business financing because it makes your company seem more legitimate.
  • Get an Employer Identification Number (EIN) from the IRS. This is a unique business tax identification number. You typically need an EIN to apply for vendor credit and small business loans.
  • Open a business bank account and business credit card. Separating business and personal finances makes accounting and tax preparation simpler. It also makes your company seem more credible when you apply for business financing.
  • Create a Google Business Profile. Being present on Google is another way to make your business look legit to lenders and suppliers.
  • Register with Dun & Bradstreet for a D-U-N-S number. This is a critical step in establishing business credit with Dun & Bradstreet and qualifying for a PAYDEX Score (business credit score) from the credit bureau.

Remember to monitor your business credit regularly. Vendors and lenders typically check your business credit rating when you apply for financing. Mistakes often appear on credit reports that could hurt your chances of being approved for business financing. Better to find them before applying for loans. 

Using it to build small business credit

If you want to use trade accounts to help build business credit, find vendors that report to a commercial credit bureau. Ask prospective ones to find out for sure. Every time you make an early or on-time payment with that vendor on your trade credit account, you’ll take a critical step toward building your business credit score and proving your creditworthiness. This will allow you to apply for things like bank loans, a business credit line, working capital loans, and more.

Best practices

It’s critical to pay on time when using trade credit. Paying late by just a few days could harm your small business credit score. (Business credit reports convey late payment behavior as Days Beyond Terms or DBT. A payment two days late may appear as 2DBT, for example.) Plus, late fees could add up over time. 

Always keep track of due dates. Small business accounting software makes it easy to set alerts and handle automated payments.

Paying early may help you improve your business credit. Plus, once you’ve built a solid payment history with your vendor, you can request longer payment terms, which could help improve your cash flow. You may want to request a higher credit limit. Vendors and suppliers want to build customer loyalty and sell more of their offerings, so they’ll likely agree. They’ll probably be willing to work with you if you are a good customer who pays on time.  

The bottom line

Vendor accounts can be a sound source of short-term financing. It can help you improve cash flow, gain control over your balance sheet, and build business credit. If used sensibly, it could be a good idea to leverage vendor accounts to purchase goods and services your company needs.

Here are some of the pros and cons of trade credit to help you decide if it’s right for you.


  • Trade credit allows you to purchase the goods and services your company needs and delay payment. They’re an excellent way to gain control over cash flow and your accounts receivable and payable
  • Trade credit can help you build a business credit history, allowing you to qualify for short-term loans and other business financing in the future.
  • Some vendors approve trade credit for new businesses, often the first form of financing for entrepreneurs and startups.
  • Certain vendors don’t check personal credit scores before approving trade credit applications, making them a possible financing option for business owners with bad credit.
  • Many vendors don’t charge interest on trade credit financing, making it an attractive option.


  • You could lose out on trade discounts if you take advantage of trade credit which could harm the bottom line of your business.
  • Not all vendors report your account history to a commercial credit bureau, so if you’re using trade credit to build up your business credit, working with these vendors won’t help.
  • Using trade accounts could harm your business credit if you don’t pay on time. If you fall behind on payments, the negative impact on your business credit score could be severe.
  • You could be charged costly late fees or incur other penalties if you don’t pay your bills on time.
  • Being approved for trade credit isn’t guaranteed. You might need to pay cash for purchases, build credibility with vendors, then apply for vendor credit at a future date.

In the end, vendor credit is a good solution for most small businesses, especially if business owners understand it completely and use it properly.

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