Trade Credit

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DEFINITION of 'Trade Credit'

An agreement where a customer can purchase goods on account (without paying cash), paying the supplier at a later date. Usually when the goods are delivered, a trade credit is given for a specific amount of days - 30, 60 or 90. Jewelry businesses sometimes extend credit to 180 days or longer. Basically, this is a credit a company gives to another for the purchase of goods and services.

BREAKING DOWN 'Trade Credit'

The amount of days for which a credit is given is determined by the company allowing the credit, and is agreed upon by both the company allowing the credit and the company receiving it. With the extension of the payment date, the company receiving the credit essentially could sell the goods and use the net proceeds to pay back the debt. This type of credit is sometimes given to encourage sales. At times, a supplier may give a discount, if the customer pays within a certain period of time. For example, a 2% discount if payment is received within 10 days of issuing a 30-day credit.

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