B2B business owners are constantly seeking strategies to fuel growth and strengthen customer relationships.
The basic concept of trade credit – allowing trade customers to purchase now and pay later – might seem like an excellent way to achieve these goals, including:
- Increasing sales
- Attracting more customers with increased payment flexibility
- Standing out from your competitors with more favourable payment terms
Yet, trade credit also comes with significant downsides that could impact how a business operates.
This article looks at the risks and advantages of trade credit that business leaders should know about to get a clear understanding of whether this sales approach matches their business goals and risk tolerance.
- What is trade credit?
- What are the advantages of trade credit?
- What are the disadvantages of trade credit?
- Mondu’s BNPL: The benefits of trade credit – without the risks
What is trade credit?
To objectively assess the advantages and disadvantages of trade credit in business, it is essential to first define what trade credit is, compared to other financing options.
Trade credit is a short-term financing arrangement where a supplier allows a buyer to purchase goods or services now and defer payment until a later date.
The supplier creates an accounts receivable, which acknowledges that the buyer will pay the full amount after a set period, typically 30, 60, or 90 days. The terms of this arrangement often come down to the customer’s creditworthiness and relationship with the supplier.
Many small businesses and larger enterprises use trade credit agreements as part of their supply chain management.
Traditional trade credit is not the same as a business line of credit, which requires a formal application and often accrues interest, and it does not typically involve a third party.
Some solutions, like B2B BNPL, do involve a third party that steps in to manage the payment process, pay the supplier upfront, and handle collections from the buyer, but these are not a standard trade credit arrangement.
Knowing the subtle differences between business credit arrangements, like BNPL vs trade credit insurance, should be within every business leader’s remit if they want to make informed decisions.
Offering trade credit can be a business growth driver if everything goes well, but it carries an element of risk that the supplier should be fully aware of.
What are the advantages of trade credit?
More sales and higher order values
One key advantage of offering trade credit to your buyers is its impact on sales.
Businesses that allow their trade customers to defer payments tap into a wider customer base, including those with tighter budgets and cash flow constraints.
“In any business, you want to make it as easy as possible for your customers to purchase,” says Phillip Hale, Senior Product Manager at Experian. “Trade credit can do just that by stimulating sales, even when customers may not have immediate funds available.”
Often, even if a buyer doesn’t have liquidity concerns, they prefer to use trade credit to optimize their own working capital and avoid tying up funds immediately.
Take the example of SMEs that might use trade credit financing to acquire necessary supplies while focusing their limited capital on other critical areas like marketing or product development.
Customers are also likely to increase their order size if they defer payment, making larger purchases more manageable within their financial planning.
Both opening up customer catchment and boosting the average order size help businesses increase their market share and grow sales.
It strengthens trade customer relationships
Providing trade credit goes beyond the immediate financial transaction and can help the supplier build a bond with their customers.
By extending credit, the supplier shows that it trusts its customers’ ability to meet their obligations. This is a type of PR exercise that makes a customer feel valued; that the supplier understands their business needs and, crucially, that they are willing to partner with them beyond a single sale.
In return, a customer who feels trusted is much more likely to be a loyal one who buys from that business repeatedly, ahead of rivals. Customer loyalty is particularly beneficial for new businesses seeking to build reliable supply chain relationships and, of course, a solid reputation.
Consistent and reliable credit terms can make a supplier a preferred partner, something worth its weight in gold in a competitive market.
It improves cash flow for your customers
Predictable cash flow is vital for a business’s ongoing operations and expansion, so if your trade customers can pay for their goods in 90, 60, or even 30 days, then they will see a boost in available funds.
This will help them to preserve their working capital for growth opportunities and scale their operations, which will in turn lead to bigger orders as they expand.
Often, growing businesses see their trade credit suppliers as an ally that has helped them in their scaling process.
It can give you a competitive edge
Suppliers that can offer favourable trade credit terms stand out from competitors that insist on rigid upfront payments. Potential customers are more likely to go with a supplier that can give them this flexibility in their repayment terms.
In competitive markets, this capability can act as a competitive edge, with some buyers even seeing trade credit as a kind of “interest-free loan” which gives them more financial breathing space.
What are the disadvantages of trade credit?
The advantages of trade credit make it a popular option, but it also comes with several risks.
It slows down your cash flow
Allowing trade customers to make delayed payments can put significant pressure on a supplier’s cash flow, especially across Europe where late payments are a widespread challenge. On average, one out of every two invoices in commercial transactions within the EU is paid late, or not at all. This issue intensifies during periods of economic uncertainty, and it’s particularly damaging for SMEs that depend on steady cash inflows to operate.
SME trade credit providers in the UK with business borrowing
Source: Intuit QuickBooks
The impact of late payments creates a domino effect: 70% of EU companies say that being paid on time would enable them to pay their own suppliers promptly. A single day’s reduction in payment delays could collectively boost EU companies’ cash flow by 0.9% and save €158 million in financing costs.
However, relying on financing options isn’t just a small business issue in this regard. Any company must carefully balance the benefits of increased sales with the potential impact of slower cash flow.
Associated admin tasks demand extra resources
Providing trade credit introduces a layer of administrative complexity that either takes up the time of existing staff or requires extra recruitment.
Checking a trade customer’s credit rating (including their credit history), providing a clear repayment terms schedule, and setting up the trade credit agreement are all admin tasks that the seller must add to their operations.
Later on, accurate invoicing and efficient collections management are all essential and add to the workload. Collections are particularly time-consuming and typically require a process similar to the following:
- Payment reminder: An initial communication, often automated, is sent a few days before or on the due date.
- Formal overdue notice: If payment isn’t received, a formal notification indicating the invoice is past due.
- Escalation: Further communication, with added fees or stricter language, if the payment remains outstanding.
- Final demand/external action: If all prior steps fail, this could involve a final letter before potentially engaging a collections agency.
Businesses are often not fully aware of the added burden this brings, which can lead to them experiencing financial difficulties as they scramble to keep up.
It can lead to legal disputes and bad debts
Hiring a collections agency and threatening legal action is a potentially costly last resort, but what if the customer doesn’t agree, experiences insolvency, or simply refuses to pay?
“If a customer wants to pay in 30 or 60 days, it’s the supplier who basically acts like the bank”, says Andy Buckell, Senior Sales Executive at Mondu. “They deliver the goods or services and then wait to get paid. If the customer doesn’t pay, it’s the supplier that takes the hit.”
This is when a court battle hovers into view, bringing significant legal fees and a prolonged process with it.
You might choose to drop the case rather than incur these fees, especially if it is a small payment, but then you must write off the deal as a non-payment (bad debt) and absorb the financial loss.
The pros and cons of offering trade credit
| Pros of offering trade credit | Cons of offering trade credit |
|---|---|
| Leads to increased sales | Slows down suppliers’ cash flow |
| Attracts more customers | Puts pressure on suppliers’ business finances |
| Can increase average order size | Requires a creditworthiness assessment of buyers |
| Strengthens trade customer relationships | Admin tasks demand extra resources |
| Can give suppliers a competitive edge | Can lead to legal disputes and bad debts |
Mondu’s BNPL: Get the benefits of trade credit – without the risks
Offering trade credit in-house can unlock sales and build customer loyalty, but it also presents challenges with delayed payments, administrative burden, and the risk of bad debt.
What if you could offer your trade customers flexible payment terms – a key driver of growth – without these downsides?
Mondu provides exactly that with its B2B short-term financing model. Like with trade credit, you can offer your customers deferred payments of up to 90 days, but Mondu pays you the invoice upfront, often within 24 to 48 hours.
You get the money safely into your bank account, without the risk of late payments and the issues they cause.
“With Mondu, it’s a win on both sides,” says Jake Pound, Commercial & Operations Manager at Kingspan Water & Energy. “You get cash flow certainty and don’t have to chase invoices, and your customer gets more breathing room without any awkward credit negotiations.”
The hassle of setting up and managing trade credit, including performing credit checks and chasing payments, also disappears with Mondu, as we take care of it all within our embedded solution.
“Mondu’s BNPL fits seamlessly into your online checkout process or in your offline order flow so that it modernizes your entire payments setup,” says Jake Pound. “No paperwork, no hassle.”
Partnering with Mondu gives you all of the benefits of trade credit without its risks and admin burden. The result? A healthier, more efficient business that’s ready to scale with confidence.
Want an alternative to trade credit without the risks? Contact Mondu to find out how you can use a BNPL model to grow your business.
FAQ: Advantages and disadvantages of trade credit, explained
Trade credit is when a supplier lets a buyer purchase goods or services now and pay later—usually in 30, 60, or 90 days. The supplier creates an accounts receivable (which is basically a formal acknowledgment that payment is coming), and the whole arrangement depends on the customer’s creditworthiness and their relationship with the supplier. It’s not the same as a business line of credit, which involves formal applications and interest charges.
Here’s the thing: trade credit opens up sales opportunities that wouldn’t exist otherwise. When you let customers defer payment, you’re tapping into buyers with tighter budgets who might delay purchases if they had to pay upfront. Customers also tend to place larger orders when they can manage payments within their financial planning, and this flexibility builds trust that turns you into a partner rather than just another vendor.
The cash flow impact is significant, and it’s worse than most suppliers anticipate. One out of every two invoices in commercial transactions within the EU gets paid late or not at all, which creates a domino effect where you can’t pay your own suppliers on time. Then there’s the administrative burden—credit checks, collections management, potentially hiring agencies or taking legal action—and the very real risk that you’ll have to write off bad debts when customers simply don’t pay.
It’s more than just sending invoices. You need to check credit ratings and history, set up clear repayment terms, handle accurate invoicing, and manage the entire collections process. That collections process alone involves payment reminders, formal overdue notices, escalation communications with added fees, and potentially final demands that require collections agencies or legal action if payment remains outstanding.
B2B BNPL solutions like Mondu flip the model entirely. You still offer customers flexible payment terms up to 90 days, but Mondu pays you upfront within 24 to 48 hours—eliminating late payment risk and bad debt from your books. What’s particularly valuable is that they handle all the administrative work (credit checks, collections, the lot), so you get the competitive advantage of flexible terms without actually acting as the bank yourself.
