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When it comes to financing a business, trade credit and business loans are two popular options. But which one is right for your business?
The answer depends on factors such as cash flow needs, repayment terms, and financial flexibility. In this guide, we’ll break down:
- What trade credit is and how it works
- The definition of trade credit in business
- Why businesses use trade credit accounts
- How business loans compare
- Which option is best for your business
Let’s dive in!
What is trade credit?
Trade credit is a business-to-business (B2B) financing arrangement that allows companies to purchase goods or services without immediate payment.
Instead, the supplier grants credit, and the buyer agrees to pay the invoice at a later date - often within 30, 60, or 90 days.
Trade credit is a common way for businesses to manage cash flow and keep operations running smoothly. Many companies, from small retailers to large manufacturers, rely on trade credit accounts to purchase inventory or materials without tying up working capital.
What does trade credit mean in business?
The definition of trade credit in business refers to a financial agreement where suppliers extend credit to buyers, allowing them to receive products or services before making a payment.
This short-term financing method is widely used across industries to support supply chain operations. Let’s look at an example:
A construction company needs £20,000 worth of materials for a project. The supplier offers Net 60 payment terms, meaning the company can take the materials today and pay in 60 days. This gives them time to complete the project and receive client payments before settling the invoice.
Why use trade credit?
Many businesses prefer trade credit because it offers:
- Better cash flow management as businesses can buy now and pay later.
- Interest-free financing if paid on time.
- Easier access to credit as there’s no need for bank approvals.
- Stronger supplier relationships.
Companies that effectively use trade credit can free up capital for expansion, marketing, or hiring while keeping essential inventory stocked.
Why offer trade credit?
Suppliers benefit from offering trade credit as well. Here’s why they do it:
- Attracts more customers – Buyers prefer suppliers with flexible payment terms.
- Encourages larger orders – Businesses may purchase more when they don’t have to pay upfront.
- Builds long-term business relationships – Trade credit builds trust between buyers and suppliers.
- Competitive advantage – Companies that offer trade credit often stand out in their industry.
While offering trade credit carries some risk, businesses can protect themselves by setting clear payment terms and credit limits.
How trade credit works
Trade credit typically follows these steps:
- A supplier agrees to provide credit to a buyer.
- Goods or services are delivered without upfront payment.
- The buyer receives an invoice with payment terms (e.g., Net 30).
- The buyer pays the invoice before the due date.
Common trade credit terms include:
- Net 30 / Net 60 / Net 90 – Payment is due in 30, 60, or 90 days.
- 2/10 Net 30 – A 2% discount is offered if payment is made within 10 days, but the full amount is due in 30 days.
These terms help businesses control cash flow while ensuring suppliers receive payments within a reasonable timeframe.
Pros and cons of trade credit
Pros
- Low or interest-free (if paid on time)
- Simple to access – often no formal credit check needed
- Boosts cash flow by letting you pay later
- Builds supplier relationships over time
Cons
- Short repayment window – usually 30 to 90 days
- Only for specific purchases with that supplier
- Missed payments can hurt your reputation
- Not always available from all suppliers
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What are business loans?
A business loan is a sum of money borrowed from a lender that must be repaid with interest over a fixed period. Business loans are often used for growth, expansion, or working capital.
Common types of business loans include:
- Working Capital Loans – Cover daily expenses like payroll and inventory.
- Cash Flow Loans – Provide funds to bridge gaps in cash flow.
- Term Loans – Fixed repayment over months or years.
Unlike trade credit, which applies to specific purchases, business loans provide flexible funding that can be used for various business needs.
Why use a business loan?
Many businesses opt for loans when they need:
- A larger amount of capital – Trade credit is often limited, while loans provide more funds.
- Flexible repayment terms – Spread payments over months or years.
- Growth funding – Loans can finance new projects, equipment, or hiring.
- Predictable payments – Fixed repayment schedules help with financial planning.
While business loans involve interest rates and credit checks, they provide businesses with access to larger amounts of money than trade credit. Learn more about loan purposes.
Pros and cons of business loans
Pros
- Larger sums of funding available
- Longer repayment terms for more breathing room
- Flexible use of funds – spend it where you need it most
- Predictable repayments help with planning
Cons
- Interest and fees apply
- Credit checks and documentation required
- Takes longer to arrange than supplier credit
- Other lenders may charge early repayment fees
How our loans work
At Fleximize, we offer fast and flexible business loans to support UK businesses.
It’s quick and easy to apply. There’s no need to book an appointment or fill out reams of paperwork like you would with a bank. Instead, once approved, you can receive your deposit in as little as 24 hours. Here’s how:
Apply online in minutes
Use our secure online form to apply for funding in less than five minutes. You’ll find out if you’ve passed our initial checks instantly. If you do, we’ll ask you to provide a few documents – but nothing too demanding.
Get a decision in 24 hours
You’ll be assigned a dedicated relationship manager to guide you through the final steps of your application. They’ll aim to give you a decision within 24 hours.
Receive your funds
Once you’re approved, we’ll deposit your funds immediately – usually landing in your account on the same day.
Credit and loans: How do they differ?
Feature | Trade credit | Business loan |
Purpose | Buy now, pay later for goods/services | Flexible funding for various expenses |
Repayment | Short-term (30-90 days) | Short and long-term (months/years) |
Collateral | Not required | May require security |
Risk | Supplier risk if unpaid | Borrower risk if defaulting |
Interest | Usually interest-free | Interest rates apply |
Flexibility | Limited to supplier purchases | Can be used for any business expense |
Which is right for your business?
Choose trade credit if:
- You need to buy inventory or materials with short-term repayment.
- You have strong supplier relationships and good payment history.
- You want interest-free financing for business purchases.
Choose a business loan if:
- You need a larger sum of money for growth.
- You prefer structured repayment plans over time.
- You want flexibility in how funds are used.
If you want to know more about how we can support your business, give our friendly team a call and you'll get straight through to someone who can help, like Alanah. Or, if you're ready to apply, get started by clicking the button below.
0207 100 0110
How Fleximize can help
When you choose one of our flexible business loans, you’ll get the capital you need to grow your business. Here’s why thousands of companies across the UK choose Fleximize for external funding:
We’re efficient: We offer fast business loans with minimal paperwork and funds typically deposited within 24 hours.
- We’re flexible: We want your funding to work for you, so we offer between £10,000 and £500,000 to be repaid over 3 – 60 months with top-ups and repayment holidays available.
- We’re award-winning: Our stellar work has earned us plenty of industry awards and recognition, including being named the Best Business Loan Provider and Best Alternative Funding Provider at the Business Moneyfacts Awards 2024.
- We’re trusted: We have a rating of ‘excellent’ from a thousand independent reviews on Trustpilot, and our customer case studies truly reflect how our short-term business loans have helped other companies achieve their goals.
Your common questions answered
Trade credit is usually interest-free, so it can be a cheaper option. But if you miss a payment, you may have to pay late fees or lose discounts.
Business loans have interest, but they give you more time to repay and can be used for different expenses. The cost depends on how well you manage payments.
Not always. Trade credit is based more on your relationship with suppliers than on a credit score. Suppliers may check if you’ve paid on time before or how long you’ve been in business.
Business loans, however, often require a credit check and financial records. If your credit score is low, trade credit might be easier to get.
Yes! Trade credit is common in the UK for buying goods and services. Many businesses use it to get stock, materials, or supplies before paying.
While it can be used internationally, most UK businesses use it for local purchases. It’s a useful way to manage cash flow without taking out a loan.
- Trade credit is usually short-term, meaning you must pay quickly. If you miss a payment, you could face late fees or lose trust with your supplier.
- It can only be used for supplier purchases, while loans can be used for other costs.
- If you rely too much on trade credit, it can cause cash flow problems when many invoices are due at once.
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