What is Trade Credit?
An arrangement where a supplier allows the buyer to pay 30–90 days after receiving goods — the most common form of short-term business financing in India.
Trade credit is the arrangement where a supplier delivers goods to a buyer but allows payment to be made after a defined period — typically 30, 45, 60, or 90 days. It's written as "Net 30", "Net 60", etc. on invoices. Trade credit is effectively free short-term financing for buyers.
For suppliers, trade credit is a risk: the buyer may delay or default. Indian B2B trade has a chronic delayed-payment problem — average payment cycle for Indian MSMEs is 90+ days vs a 30-day global benchmark. The MSMED Act mandates a 45-day maximum for MSME suppliers.
Suppliers mitigate trade credit risk through: credit insurance (e.g., ECGC, Euler Hermes), invoice discounting/factoring (sell the receivable to a financier at a small discount for immediate cash), post-dated cheques (PDC), and security cheques.
Buyers should not treat trade credit as a right — especially with MSME suppliers. Habitual late payment damages supplier relationships, limits future supply capacity, and can trigger MSME Samadhaan complaints (which affect company credit score on MCA21).
VyaparSethu recommends using Protected Payment for first-time supplier relationships. Once a relationship has 3+ successful deals, buyer and supplier can agree on direct payment terms (Net 30/60) and bypass escrow for those transactions.
Frequently Asked Questions
What is trade credit in simple terms?
Trade credit means a supplier lets you buy goods now and pay later — usually in 30 to 90 days. It's free short-term financing that helps businesses manage cash flow.
What is the difference between trade credit and bank credit?
Trade credit comes directly from your supplier, is usually interest-free (if paid on time), and has no formal application process. Bank credit is a loan from a financial institution with interest and formal documentation.
What happens if I don't pay my MSME supplier within 45 days?
Under the MSMED Act, if a registered MSME supplier is not paid within 45 days of acceptance, the buyer must pay compound interest at 3 times the RBI base rate. Repeated defaults can be reported to MSME Samadhaan.
Is trade credit common in Indian B2B?
Extremely common. Most established B2B relationships in India run on 60–90 day credit terms, especially in manufacturing and distribution sectors.
Related Terms
What is Escrow Payment (Protected Payment)?
An escrow holds the buyer's payment with a neutral third party until the supplier delivers as agreed — eliminating advance payment fraud in B2B trade. VyaparSethu calls this "Protected Payment".
What is a Purchase Order (PO)?
A Purchase Order is a legally binding commercial document a buyer issues to a supplier confirming the agreed product, quantity, price, delivery date, and payment terms.
What is MSME?
Micro, Small and Medium Enterprise — India's official classification for businesses below ₹250 crore turnover that unlocks priority credit, govt tenders, and subsidies.
Put this knowledge to work
Post a Requirement — verified suppliers quote with proper GST invoices, HSN codes, and Protected Payment on every deal.