What's Trade Credit? A Guide to Terms and Best Practices

Trade credit is one of the most important tools in B2B commerce. It allows businesses to buy goods or services now and pay for them later, giving customers flexibility while helping suppliers increase sales. In today’s volatile economy, understanding trade credit is critical for both finance leaders and credit managers who balance growth with risk.

What is Trade Credit?

Trade credit is a short-term financing arrangement between businesses. A supplier delivers goods or services to a buyer with an agreement that payment will be made at a later date. Unlike bank loans, trade credit does not usually involve interest if the payment is made within agreed terms.

For example:

• A supplier might extend Net 30 terms, meaning the buyer has 30 days from the invoice date to pay.
• Some agreements include discounts, such as 2/10 Net 30, which means the buyer gets a 2% discount if the invoice is paid within 10 days.

Trade credit is essentially a form of unsecured lending that requires trust, risk assessment, and monitoring.

Common Trade Credit Terms Explained

Here are the most widely used terms you’ll see in B2B trade credit:

• Net 30, Net 60, Net 90 – Payment is due 30, 60, or 90 days after the invoice date.
• 2/10 Net 30 – A 2% discount is available if the invoice is paid within 10 days; otherwise, the full amount is due in 30 days.
• EOM (End of Month) – Payment is due at the end of the month following the invoice date.
• CIA (Cash in Advance) – Payment is required before goods are shipped.
• COD (Cash on Delivery) – Payment must be made upon delivery of goods.
• Trade Credit Insurance – A policy that protects sellers from the risk of non-payment due to customer default or insolvency.

Benefits of Trade Credit

For buyers:

• Improves cash flow and working capital
• Allows businesses to purchase inventory without upfront payment
• Provides flexibility for seasonal or cyclical demand

For suppliers:

• Builds stronger customer relationships
• Can boost sales by making purchases more accessible
• Encourages customer loyalty through favorable terms
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Risks of Trade Credit

Trade credit is not without risk. Suppliers may face:

• Late payments that disrupt cash flow
• Bad debt if a customer defaults
• Fraudulent applications from fictitious businesses
• Industry downturns that weaken repayment capacity

This is why credit managers use tools like credit scoring, payment monitoring, and trade credit insurance to balance opportunity with protection.
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Modernizing Trade Credit with AI

Traditional trade credit decisions rely on static reports and references. But today’s credit teams need real-time insights to detect risk before it turns into loss. AI-powered platforms like Credit Pulse combine financial data, alternative signals, and predictive analytics to:

• Detect early signs of distress
• Automate credit applications and approvals
• Monitor customer health continuously
• Reduce bad debt exposure while accelerating growth
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The Bottom Line

Trade credit is the backbone of B2B commerce. By offering flexible payment terms, businesses can drive growth and build lasting customer relationships. But with risk rising across industries, companies must modernize how they manage trade credit. Combining time-tested terms like Net 30 or Net 60 with AI-driven monitoring and fraud prevention ensures both growth and protection.

Credit Pulse helps finance leaders modernize trade credit decisions with automation, real-time monitoring, and predictive insights across the full credit lifecycle.
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FAQs on Trade Credit

What is the meaning of trade credit?
Trade credit is when a supplier lets a customer buy goods or services and pay later, usually within 30 to 90 days.

What are typical trade credit terms?
Common terms include Net 30, Net 60, Net 90, 2/10 Net 30, COD, and CIA.

Why is trade credit important?
It improves cash flow for buyers and boosts sales for suppliers, but it requires careful risk management.

How can businesses reduce trade credit risk?
By using credit scoring, monitoring payments, securing trade credit insurance, and adopting AI-powered platforms like Credit Pulse.

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