What Are Trade Credit Accounts?

Trade credit accounts are a type of credit facility offered by B2B sellers to their customers, which allow businesses to purchase goods or services now ‘on account’ and defer payment until a later date. This is typically within a set credit term, such as 30, 60, or 90 days, according to the ability of the seller to accept deferred payment. 

‍

What is credit in a trading account?

Credit in a trading account refers to a financial arrangement between a buyer and a supplier that allows the buyer to defer payment for goods or services. 

Credit in this scenario works like a short-term loan that the supplier extends to the buyer, often without interest. This can help businesses access essential supplies they need to run their operations – think inventory, equipment or raw materials for manufacturing – without having to pay for it right away. 

Why offer trade credit accounts?

Offering trade credit is a longstanding practice in B2B, often providing essential flexibility for sellers who would otherwise not be able to pay. Given that many businesses have to make purchases in order to generate revenue, trade credit can help buyers manage their cash flow and repay debt on a manageable schedule in line with their income.

• By giving buyers the flexibility to pay later, you make it easier for them to say “yes” to larger orders and return in future. 
• Trade credit is also a powerful way to build loyalty and deepen trust, turning occasional buyers into long-term partners.
• Flexible payments can set you apart from competitors who demand immediate settlement. It shows that you’re willing to work with your customers, not just sell to them. 

And with solutions like iwocaPay, you can offer these benefits without worries taking on risky debts or chasing payments.

How does a trade account work?

Trade credit accounts are traditionally based on direct relationships between buyers and sellers. Originally, this would have been limited to businesses with whom the seller had deep enough knowledge to be sure of their ability to repay the credit. But for businesses working at scale, and often online, these arrangements also require a degree of financial transparency.

1. Application and approval: Buyers apply for a trade credit account with a supplier, providing details about their business, financial health, and creditworthiness.
2. Credit limit allocation: If approved, the supplier sets a credit limit based on the buyer's financial performance and payment history.
3. Purchasing on credit: Buyers can then make purchases up to their credit limit, with the agreement to pay the balance within the agreed credit terms (e.g., 30 days).
4. Invoicing and payment: The supplier invoices the buyer, who must settle the balance by the due date. In some cases, buyers will offer early payment discounts to incentivise faster settlement.

Does trade credit affect your credit report?

When you extend credit to buyers, it puts more pressure on your ability to manage accounts receivable. After all, trade credit is still money owed to your business – an asset rather than a liability – but it’s not crystallised until the payment is in your account.

If you rely heavily on trade credit to make sales but frequently see delays in receiving payments, it can strain your cash flow and hurt your available liquidity – and your credit score.

Trade credit account providers

Trade credit used to rely on a 1:1 relationship between buyers and sellers – and today there are still many businesses that offer trade credit accounts on their own books, approving buyers and managing the debts themselves. 

However, there are also a variety of B2B BNPL providers that facilitate trade credit accounts to businesses selling to other businesses. Leading players include iwocaPay, Kriya and Hokodo.

Offer trade credit without the risk with iwocaPay

While trade credit is a huge help for your customers and can lead to higher sales and customer retention, it has its own cost. Managing trade credit accounts for your business means dealing with risks such as late payments, bad debts, and extra admin.

iwocaPay simplifies the process:

• Instant payments for suppliers: iwocaPay ensures suppliers are paid in full immediately after a sale, eliminating cash flow risks.
• Flexible terms for buyers: Buyers gain access to credit, allowing them to defer payments and manage their budgets more effectively.
• Easy integration: iwocaPay integrates easily into existing systems, providing a hassle-free way to offer trade credit.‍
• Risk-free credit management: iwocaPay handles credit assessments, collections, and risks for you, allowing suppliers to offer trade credit with confidence.

‍

{{find-out-iwocapay-cta="/components"}}

‍

Trade credit accounts FAQs

Is trade credit accounts receivable?

Yes, trade credit is closely linked to accounts receivable. For suppliers, trade credit represents money owed to them by buyers for goods or services provided on credit terms. These unpaid balances are recorded as accounts receivable on the supplier’s balance sheet until payment is received. Managing trade credit effectively is crucial for maintaining healthy cash flow and reducing the risk of late or missed payments.

What are wholesale trade credit accounts?

Wholesale trade credit accounts are tailored for businesses purchasing goods in bulk from wholesalers. These accounts often feature higher credit limits and longer payment terms, as they support large-scale transactions essential for industries like retail, manufacturing, and construction. By offering wholesale trade credit accounts, suppliers can foster loyalty and facilitate substantial repeat orders, helping both parties grow their businesses.

‍