What is trade credit?

Trade credit is defined as the ability for a business to purchase goods and services while agreeing to pay for them at a later date, typically within a specified period, such as 30, 60, or 90 days. This arrangement allows businesses to manage their cash flow effectively, as they can receive and use the products before making payment. This delay in payment assists businesses in maintaining liquidity and can also support them in making strategic purchases without immediate cash requirements.

Businesses often rely on trade credit as a critical component of their financing strategy, especially when they have significant inventory needs or when they are investing in growth without immediate revenue.

The other options fall into categories that include bank loans or secured loans, which do not accurately reflect the nature of trade credit. Trade credit is more about the relationship between suppliers and buyers regarding payment terms rather than formal loan agreements or the nature of the goods traded.