What is trade credit?

Trade credit refers to the practice where a buyer is allowed to purchase goods or services and defer payment until a later date. This arrangement is commonly used in business-to-business transactions, allowing companies to manage their cash flow more effectively. By purchasing on credit, businesses can maintain their operations without immediate cash outflow while still ensuring they have the products or services needed to continue their operations.

This approach is advantageous because it can foster stronger relationships between suppliers and buyers. It also enables businesses to invest in opportunities or handle expenses even when liquidity might be tight. The terms of trade credit can vary widely based on the seller's policy and the buyer's history, including factors such as the amount of credit extended, the time frame for repayment, and any discounts that might be offered for early payment.

The other options do not accurately capture the essence of trade credit. For instance, paying for goods upon delivery and paying cash immediately denotes immediate transactions rather than deferring payment, while offering discounts for early payments typically relates to accounts payable management rather than the concept of trade credit itself.