trade credit

System where businesses are given one to three months to pay for goods purchased from suppliers. For example, a food manufacturer may sell food to a supermarket. It then gives the supermarket three months from the time the food is delivered to pay the invoice for the food. By not paying immediately, the supermarket can enjoy up to three months of interest-free credit or borrowing.

Trade credit extended by a company to a purchaser of its products is a current asset on the company's balance sheet. The trade credit which it owes is a current liability. Firms can use a factor (a company which specializes in collecting debts on behalf of other companies) to collect the trade credit which it is owed.