# Trade Credit: The Invisible Loan Inside Every B2B Deal

When a distributor in Ahmedabad accepts a ₹10 lakh order from a retailer and agrees to "30 days' credit," something remarkable happens: a loan is created. No paperwork, no sanction letter, no interest rate discussed. Yet it's a loan all the same — of goods and money — and it's arguably the largest source of business financing in India.

Trade credit deserves the same scrutiny you'd give any loan. Here's how to see it clearly.

What Trade Credit Is

Trade credit is the delay between receiving goods or services and paying for them. During that window, your supplier has effectively lent you the value of the invoice — interest-free on paper, but rarely free in practice.

The standard vocabulary:

  • Net 30 / Net 45 / Net 60: full payment due in that many days.
  • 2/10 Net 30: pay within 10 days and take a 2% discount; otherwise pay in 30.
  • Consignment: you pay only when you sell — trade credit in its most flexible form.

In India, where MSMEs supply large corporates on 60–120 day terms despite MSMED Act protections mandating 45-day payment to registered micro/small enterprises, trade credit is less a choice than an ecosystem norm.

The Hidden Cost: Reading the Fine Print

That "free" credit has a price. Consider the 2/10 Net 30 offer:

If you skip the discount and pay on day 30, you're paying 2% extra for 20 extra days of financing. Annualised:

(2 / 98) × (365 / 20) ≈ 37% per annum

You would never accept a 37% bank loan, yet businesses decline these discounts daily without doing the math. Whenever early-payment discounts exist, compute the annualised rate before deciding.

Even without explicit discounts, trade credit isn't free:

  • Suppliers price longer terms into higher quotes.
  • Late payment damages your standing precisely when you need flexibility.
  • Under GST, delayed payments can complicate input tax credit timing and reconciliation between purchase registers and GSTR-2B.

Two Sides of the Same Coin

If you're the buyer

Trade credit is leverage — used well:

  • Match terms to cash conversion. If your inventory turns in 40 days and sells on 30-day credit to customers, supplier terms shorter than 70 days mean you're financing the gap yourself.
  • Negotiate deliberately. Volume commitments, prompt-payment history and consolidated ordering all earn longer terms. Ask annually; terms are rarely volunteered.
  • Never stretch silently. Paying day 90 on day-45 terms without notice converts goodwill into resentment. If you need an extension, ask before the due date.

If you're the seller

Every rupee of credit you extend is working capital you've financed:

  • Track DSO by customer segment, not just overall.
  • Charge for it — either explicitly (GST-compliant interest on late payment) or implicitly through pricing tiers for different terms.
  • Screen new buyers. A GSTIN lookup, credit bureau check or even a simple trade reference call prevents most bad debt.
  • Use MSME registration if eligible — it gives you legal backing for 45-day payment enforcement and compound interest on delays.

When Trade Credit Breaks

Trade credit chains are invisible until they snap. One large corporate delaying payments cascades through dozens of MSME suppliers, each of whom delays their own vendors. This systemic fragility is exactly why instruments exist to decouple it: bill discounting, TReDS platforms for MSME receivables, and newer buyer-side arrangements.

Vendor financing platforms attack the problem from the other end. KredFlow, for instance, lets a buyer split an annual contract into monthly payments while the vendor receives the full amount upfront — the buyer keeps their trade-credit-like comfort, the seller gets immediate liquidity, and no informal loan sits festering between them.

A Practical Framework

Before accepting or extending any trade credit term, ask:

  1. What's the annualised cost, including any forgone discounts?
  2. Does the term match my cash conversion cycle (as buyer) or my financing capacity (as seller)?
  3. What happens on default — legally and relationally?
  4. Is there a cheaper way to achieve the same cash outcome?

    5. The Bottom Line

    Trade credit built Indian commerce — from textile markets to pharma distribution, entire ecosystems run on trust and 60-day terms. But treating it as "just how business works" means never optimising it. Price it, negotiate it, monitor it, and know when a structured alternative beats an informal loan.

    The next time someone offers you Net 60, remember: someone just offered you a loan. Decide like a borrower, not a bystander.