What Is Trade Credit? A Plain-English Guide
Trade credit is an arrangement where a supplier lets a business customer receive goods or services now and pay for them later, on agreed terms. It's one of the oldest forms of business financing, and one of the least understood, because it rarely gets called financing at all.
What Trade Credit Means
Trade credit means a supplier extends short-term credit to a business customer, allowing the customer to take delivery of goods or services before paying for them. Instead of paying on the spot, the customer pays within an agreed window, commonly 7, 14, 30 or 60 days from the invoice date.
It's called "trade" credit because it happens between trading businesses, not between a bank and a borrower. No loan application, no separate lender, and usually no interest charged, provided the customer pays within the agreed term. The supplier is simply agreeing to be paid later rather than now, in exchange for winning or keeping the sale.
In New Zealand, trade credit shows up as a trade account: a business customer applies to a supplier for an account, the supplier sets a credit limit and payment term, and every invoice raised against that account follows the same terms until either side changes them.
How It Works in Practice
A typical trade credit relationship follows the same basic shape, whatever industry it's in:
- The customer applies for an account. This usually means a credit application, trade references, and sometimes a director's guarantee.
- The supplier sets terms. A credit limit (the maximum owing at any time) and a payment term (Net 30, EOM 30, or similar) are agreed.
- Goods or services are supplied on invoice. The customer doesn't pay at the point of sale — an invoice is raised instead, due on the agreed term.
- The customer pays by the due date. Provided the account stays within its limit and terms, this cycle repeats invoice after invoice.
For the full mechanics of that process, including a worked example, see how trade credit works for a small NZ business.
Trade Credit vs Trade Credit Insurance
Search "trade credit" in New Zealand and most results are about trade credit insurance — a completely different product. Trade credit insurance is a policy a supplier buys to protect itself against a customer failing to pay. It insures the risk of extending trade credit; it isn't the credit arrangement itself.
Trade credit is the underlying commercial relationship: a supplier letting a customer pay later. Trade credit insurance is one way a supplier can manage the risk that comes with offering it, alongside setting conservative credit limits, taking deposits, or using an externally funded option like PaidTerms Capital instead of carrying the receivable themselves. If you're comparing ways to manage that risk directly, see the pros and cons of offering trade credit.
Who Offers Trade Credit
Trade credit is most common in B2B trade — wholesalers, building suppliers, manufacturers and distributors selling to other businesses that need stock or materials before they've been paid by their own customers. It's less common in consumer retail, where payment is usually taken immediately.
New Zealand's building and trade supply sector is a good example: a builder opens a trade account with a merchant, orders materials for a job, and pays the account monthly rather than for every individual purchase. This is exactly the relationship covered in our full guide to NZ payment terms, which sets out every common term a trade account might use.
Frequently Asked Questions
Is trade credit the same as a loan?
Not formally, but economically it's similar. The supplier is providing the value of the goods or services now and being repaid later, without charging interest in most cases, provided the customer pays on time.
Does trade credit affect my business credit score?
It can. Many NZ credit bureaus collect trade payment data, so consistently paying trade accounts on time can support a business's credit profile, while late payments can affect it.
Is trade credit free?
There's usually no interest charged if you pay within the agreed term. The real cost is indirect: suppliers who extend a lot of trade credit often build that risk into pricing, and paying late can bring fees or a reduced credit limit.
How is a credit limit decided?
Suppliers typically assess it from a credit application, trade references, and sometimes a credit check, then set a limit that reflects the customer's payment history and the size of orders they expect to place.
What happens if I go over my credit limit?
Most suppliers will hold further orders until the account is brought back under the limit, either by paying down the balance or by the supplier agreeing to a temporary increase.
Modern Trade Credit, Without the Paperwork
PaidTerms lets NZ businesses offer or use flexible payment terms without either side carrying the admin of a traditional trade account.
Read next: how trade credit works for a small NZ business, or the pros and cons of offering it.
