Trade Credit: What It Is and Why You Should Pay Attention

Just about every survey and data source says that trade credit is the second largest source of small business financing after banks (and after self-funding/families/friends). The question is: are you taking advantage of it?

Trade credit simply means that a vendor extends you credit terms, giving you extra time to pay or giving a discount for early payment.

Check for trade credit terms on invoices

Trade credit terms are often expressed in a kind of shorthand consisting of 3 numbers.  A common trade credit term is 2/10/30.

Let’s dissect these numbers:

The first number – 2 – refers to a 2% discount. You can claim this 2% discount (deducting it from the amount owed) if you pay your vendor within 10 days – the second number. The third number – 30 – means that you must pay the balance in full within 30 days.

You will often see these 3 numbers or some variation (“2/10, Net 30”) on an invoice you receive.

Trade credit terms can vary.  Sometimes the invoice might say 1/10/30 (meaning, you get a 1% discount if you pay within 10 days, and the balance must be paid in full within 30 days).  Or, it might say 2/10/60 (meaning, you get a 2% discount if you pay within 10 days, and the balance must be paid in full within 60 days).

When you get an invoice with such terms on it, take advantage of them. The savings do add up.

But then you might wonder, which do I go for, the discount or the longer time period to pay?

The first thing I would look at it is my cash flow. If I were in a business where cash tended to be tight, I’d go for the 30 days to pay. That way I could keep my cash as long as possible. In essence, it amounts to your vendors providing a working line of credit for your business, at 0% interest.

If cash flow is not a big issue — let’s say you are able to keep a nice bank balance with a sufficient cash cushion at all times — then I’d grab the discount.

Let’s consider this example, of an invoice for $4,000, that you pay 12 times a year. By taking advantage of a 1% discount you save $480. If the vendor offers a 2% discount, your savings will be almost $1,000 in a year. Multiply that by several vendors, and it becomes serious money.

The way I look at it is: if I can save $1,000, I think about how much I’d need to raise prices or how many more sales I’d need, in order to drop $1,000 to my bottom line. Because that $1,000 saved is pure profit! There’s no overhead that has to be deducted from it, as would be the case if you just made an extra $1,000 in sales.

OK, that all sounds great. But what if your vendor does not offer such terms? What if the invoice merely says “Net 30,” meaning that the vendor expects you to pay within 30 days. Then in that case, there are ways to get trade credit discounts or the equivalent:

  • Ask the vendor for an early-payment discount. Let’s say you are able to pay for 3 months’ or 6 months’ service in advance. Vendors, especially other small businesses, will often agree readily to a 1% or 2% or even 3% discount in those circumstances, if you just ask. If you are a good customer, they will want to please you. And by enticing you to pay early, it decreases their accounts receivable cycle and improves their cash flow. So it’s in their interests to give a discount to get you to pay early.
  • Use a charge card that automatically gives you an early payment discount. A few years back I covered the introduction of the American Express Plum Card, which offers the equivalent of trade credit terms. It’s a neat idea: if you use the card for purchases, and pay within 10 days, you get an early payment discount on all purchases (whether your vendor offers a trade credit discount or not). And by the way, if the vendor also offers a trade term discount, you can in effect get a double discount – the vendor’s discount and the discount from using the card and paying the card balance early.

Finally, let me leave you with this thought: the biggest temptation is to assume that your numbers are small and therefore these kinds of savings do not matter in your business. Wrong. The amounts might seem small individually. But, remember, savings drop 100% to the bottom line – they are all profit. When you add up small savings from a variety of sources, these are the stuff of improving your bottom line of profit.


Anita Campbell Anita Campbell is the Founder, CEO and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses.

12 Reactions
  1. Thanks for the reminder Anita. It seems so easy to let a 1 or 2 percent price break slip away, but in the end you’re shooting yourself in the foot.

  2. Good advice. It’s important to review payment terms and know what they mean. If you can save a few bucks each month, all the better. Most people just pay the invoice total without knowing that they could potentially save money.

  3. If you have terms that offer a discount for payment within a certain time period, then by all means, everyone should be taking advantage of this right now. Every little penny adds up. I like the idea of just asking for an early payment discount as well. That’s a great idea and all they can do is say “no” – and if they’re getting their money faster – why would they? Makes perfect “cents” 🙂

  4. Hi Anita –

    One of the big questions about trade credit is whether one should offer it or not. There is always a risk of offering 30 or 60 days and having the client default on the invoice. That can be very significant, especially to a small business.

    I wrote a short blog post a few days ago on how to do simple credit reviews on commercial clients – it’s at this link:
    offering 30 days terms. NOte this is very basic stuff and does not go into more complex checks…

    The gist of it is that one has to check out their clients thoroughly – either though a commercial bureau or using a credit app – to ensure that prospects have a good payment history.


  5. I work with clients in a B2B environment; most of them offer, and use, trade credit. The biggest issue is often the ‘abusers’ – those companies that take the discount but don’t pay within the terms! This is particularly challenging to deal with when the customer is a large account – trying to get them to pay within terms can be a challenge.

  6. Martin Lindeskog


    I recognize your arguments. You sound like a purchaser! 🙂

    “The way I look at it is: if I can save $1,000, I think about how much I’d need to raise prices or how many more sales I’d need, in order to drop $1,000 to my bottom line. Because that $1,000 saved is pure profit!”

    I saw this trade credit take place when I was buying from German suppliers.

  7. Oh I honestly didn’t have an idea about this Anita. Thanks for sharing this information. I will try to search in the major credit card companies here in PH if they too have that kind of discounts. I hope it applies here in PH.

    Thanks again!

    Mary Grace

  8. Kris –

    We see that a lot too – small clients offer a 2% net 10 to a large client, only to have the large client pay in 45 days and still take the 2% discount (thank you very much).

    I am not sure there is much that you can do. Some have tried eliminating the 2% discount, but that puts them at risk of loosing the large client. Others have tried having a conversation with the paying manager. They were not receptive though… they liked the 2% discount and the ability to pay late.

    One thing we tried, with some sucess, is imprinting all invoices with a small “We report all trade experiences to credit bureaus” message. We made it small enought to be noticed, but not taken as a threat. Think small font, yet conspicuous 🙂

    Well, they noticed it alright. We got some calls about it by clients. We calmly explained that as a matter of process we shared our payment experiences with credit bureaus as it also allows our clients to build a good credit history – a necessity in this economy. We always slated things in the positive and ***NEVER*** as a threat.

    For the most part clients started paying with in terms.

    But bear in mind, it can be a risky strategy as some clients may take the message the wrong way.