How Does Trade Credit Work for a Small NZ Business?
For a small business, trade credit usually starts with a single application to one supplier and grows from there. Here's the process step by step, with a worked example showing how the numbers actually play out.
The Trade Credit Process, Step by Step
Apply for an account
The business completes a credit application with the supplier, usually including trade references and basic financials.
Supplier sets a credit limit and term
Based on the application, the supplier agrees a maximum balance the account can carry and a payment term, such as Net 30 or the 20th of the month following.
Orders are placed and invoiced
Instead of paying at the point of sale, the business orders against the account and receives an invoice with the agreed due date.
The balance builds across the month
Every invoice raised in the period adds to the account balance, up to the agreed credit limit.
The business pays by the due date
The account is settled (in full or per the agreed schedule) by the payment term, and the cycle starts again the next period.
A Worked Example
A small landscaping business opens a trade account with a building supplies merchant. The merchant sets a $5,000 credit limit and Net 30 terms.
- 1 March — orders $1,800 of materials for a job. Invoice dated 1 March, due 31 March.
- 12 March — orders another $1,200. Invoice due 11 April.
- Account balance sits at $3,000, under the $5,000 limit, so further orders can still be placed.
- 31 March — the business pays the $1,800 invoice on time. Balance drops to $1,200.
- 11 April — the business pays the remaining $1,200. Balance returns to $0.
Through the whole cycle, the business never paid interest, but it also never had the materials paid for by anyone but the merchant, who effectively funded the gap between supply and payment out of its own working capital.
What Suppliers Check Before Extending Credit
Before approving a new account, most NZ suppliers look at:
- Trade references from other suppliers the business already deals with
- Time trading and basic company or director information
- A credit check through a bureau, particularly for larger limits
- Expected order size and frequency, to set a sensible limit rather than an arbitrary one
New businesses with no trading history often start on a modest limit, sometimes with the first few orders on upfront payment, and get their limit increased as a payment history builds.
What Happens If You Don't Pay on Time
Missing a due date on a trade account rarely results in immediate consequences for a first, minor lapse, but it does start a process:
- A reminder or statement, often with a short grace period
- Further orders held until the balance is brought under the limit
- Late fees or interest on the overdue amount, if the supplier's terms allow it
- A reduced credit limit or a move to stricter terms (such as cash on delivery) if late payment becomes a pattern
For the supplier's side of this cost, see the hidden cost of offering trade credit.
Frequently Asked Questions
How long does it take to get approved for a trade account?
Often a few days, though it depends on the supplier and how quickly trade references respond. Some suppliers offer a small starting limit immediately and review it after the first few orders.
Can I have trade accounts with more than one supplier?
Yes, and most established businesses do. Each account has its own limit and terms, and the business manages the combined balance across all of them.
Does trade credit cost anything if I always pay on time?
Not directly in most cases — no interest is charged for paying within the agreed term. Any cost is usually built into pricing rather than charged as a separate fee.
Can my credit limit increase over time?
Yes. Suppliers commonly review limits after a track record of on-time payment, particularly if order sizes are growing.
What's the difference between a credit limit and a payment term?
The credit limit is the maximum balance the account can carry at once; the payment term is how long you have to pay each invoice. Both are set when the account is approved.
Get Paid Upfront, Whatever Terms You Offer
PaidTerms Pro pays suppliers upfront on every invoice, so extending trade credit doesn't have to mean funding the gap yourself.
Read next: what trade credit is, or the pros and cons of offering it.
