Trade credit is short-term financing built into a business-to-business sale: a supplier delivers goods or services now, and the buyer pays later, usually within 30 to 90 days. For newer companies without easy access to bank loans, it is often the first and largest source of outside financing they will ever use. The terms vary by supplier, but the framework — how the deal is priced, what documents you sign, and what the law lets each side do — is consistent enough to learn once and apply everywhere.
How the Terms Work
Every trade credit arrangement runs on a few core pieces. Net terms set the payment window. “Net 30” means the full invoice amount is due 30 days after the invoice date; “Net 60” gives you 60 days. The supplier also sets a credit limit, which caps how much unpaid debt you can carry at once. Go over that limit and the supplier will typically hold new orders until you pay down the balance.
Early payment discounts reward buyers who pay ahead of the deadline. The shorthand “2/10, Net 30” means you get a 2 percent discount if you pay within 10 days; otherwise the full amount is due at 30 days. That 2 percent sounds small, but annualized it works out to roughly 36 percent, which is why finance teams pay close attention to these incentives.
End-of-Month and Proximo Dating
Some suppliers use billing cycles that reset around the calendar month rather than the invoice date. “EOM” (end of month) means the payment clock starts at the end of the month in which the invoice was issued. So “Net 30, EOM” on a March 12 invoice means payment is due 30 days after March 31, not 30 days after March 12. “Prox” (short for proximo, meaning “next month”) works the same way. “1/15 Prox” means a 1 percent discount if you pay by the 15th of the following month. These dating methods are common in industries with high order volumes because they let both sides batch invoices into a single monthly payment cycle.
What Suppliers Ask For on the Application
Before extending credit, a supplier needs to verify that your business is real, solvent, and likely to pay. A typical application package includes:
- Your legal business name and federal Employer Identification Number (EIN) from the IRS, confirming you are a registered entity.
- Your D-U-N-S Number, a nine-digit identifier from Dun & Bradstreet that suppliers use to pull your business credit profile and evaluate payment history.1Dun & Bradstreet. D-U-N-S Number Questions
- Current financial statements — a balance sheet and income statement showing revenue, assets, and liabilities.
- Two to four trade references from existing suppliers who can confirm how reliably you pay. Track record matters most here, especially if your business is young.
Most vendors provide a credit application form through their website or credit department. You enter your financial data, authorize the supplier to run a credit investigation, and sign. Incomplete applications are the most common reason for delays, so double-check every field before submitting. If the supplier’s credit team follows up with questions, respond quickly. Silence is what kills applications.
The approval notice specifies your credit limit and net terms. From that point, future purchase orders draw against your credit line automatically, and each invoice shows the balance due and the payment deadline. Suppliers often start new accounts with conservative limits and increase them after six to twelve months of on-time payments, so early performance matters.
Does Your Spouse Have to Sign?
If the supplier asks for a personal guarantee and you are a sole proprietor or run a closely held business, you may wonder whether your spouse also has to sign. Federal law says no, with limited exceptions. The Equal Credit Opportunity Act, implemented through the Federal Reserve’s Regulation B, prohibits a creditor from requiring a spouse’s signature when the applicant individually qualifies for credit. Even where the supplier requires a personal guarantee from an owner, officer, or partner, it cannot demand that person’s spouse co-sign simply because of the marital relationship.2Federal Deposit Insurance Corporation. Guidance on the Spousal Signature Provisions of Regulation B
The main exception arises when the credit is secured by jointly owned property. In that situation, the spouse may need to sign documents that grant the creditor access to the collateral, but even then, the spouse’s signature should not impose personal liability for the debt itself.2Federal Deposit Insurance Corporation. Guidance on the Spousal Signature Provisions of Regulation B
What You Are Actually Signing
Two documents inside a routine credit application do most of the legal work, and both deserve a careful read.
Personal Guarantees
Many suppliers require a personal guarantee from the business owner, especially when the company is new or has a thin credit history. A personal guarantee makes you individually liable for the debt if the business cannot pay. The creditor can pursue your personal assets, not just the company’s. This is the single most consequential document in a trade credit application, and it is the one owners most often sign without reading carefully. Check whether the guarantee is limited (capped at a specific dollar amount) or unlimited, and whether it survives after you leave the business.
UCC-1 Filings and PMSI Priority
When a supplier wants to protect its position against other creditors, it files a UCC-1 financing statement. This public filing puts everyone on notice that the supplier has a security interest in specific assets of the buyer, typically the inventory it sold on credit. If the buyer defaults or goes bankrupt, the creditor with a perfected security interest gets paid before unsecured creditors.
Suppliers who deliver inventory on credit can go a step further and claim a purchase-money security interest, or PMSI. A PMSI gives the supplier priority over even earlier-filed security interests in the same inventory, as long as specific conditions are met: the interest must be perfected before the buyer takes possession of the goods, and the supplier must send advance notice to any other creditor who already has a filed financing statement covering that type of inventory. The supplier’s priority also extends to identifiable cash proceeds from the inventory, provided those proceeds are received before the goods are delivered to a downstream buyer.3Legal Information Institute. UCC 9-324 – Priority of Purchase-Money Security Interests
A supplier who perfects a PMSI effectively jumps the line ahead of a buyer’s bank or other lenders, which is a powerful collection tool. If you sign a security agreement as part of a credit application, you may be granting exactly this kind of priority lien on the inventory you buy.
Get It in Writing
Uniform Commercial Code Article 2 governs the sale of goods across all 50 states, with state-specific variations. Under UCC Section 2-201, a contract for the sale of goods at or above a certain dollar threshold generally must be in writing to be enforceable. Most states set that threshold at $500, following the original UCC text; a handful that adopted the 2003 revision use $5,000.4Legal Information Institute. UCC – Article 2 – Sales Nearly every meaningful trade credit order should be backed by a written agreement, purchase order, or signed invoice. A verbal deal on a large shipment is fragile if a dispute arises.
What Happens If You Pay Late
Paying late on trade credit triggers a cascade of problems that most business owners underestimate.
The most immediate hit is to your business credit profile. Suppliers and lenders report payment data to business credit bureaus like Dun & Bradstreet, Experian, and Equifax.5Consumer Financial Protection Bureau. The Trends of Commercial Credit Reporting on Consumer Credit Late payments drag down your business credit scores, which directly affects the terms and limits other suppliers will offer.
The supplier can also charge late fees and interest on overdue balances. Rates and rules vary by state. More than 30 states have no statutory cap on commercial late fees, though the charges generally must be spelled out in the original credit agreement to be enforceable. A few states tie their limits to formulas based on the Federal Reserve discount rate. Read the late-payment terms in your agreement before you need them.
If the account goes to collections, an important distinction separates business debt from consumer debt: the Fair Debt Collection Practices Act does not apply. The FDCPA protects only debts incurred for personal, family, or household purposes and explicitly excludes corporate and business obligations.6Consumer Financial Protection Bureau. Fair Debt Collection Practices Act Procedures Commercial debt collectors face fewer restrictions on how aggressively they can pursue you, and you lack procedural protections consumers take for granted, like dispute verification timelines.
A supplier with a personal guarantee can pursue the owner’s individual assets. A supplier with a perfected security interest can seize the collateral. If the debt is large enough, the supplier may sue for breach of contract. The consequences compound quickly, and the legal protections available to businesses are thinner than most people assume.
Can a Supplier Offer You Worse Terms Than a Competitor?
Not without a reason the law recognizes. The Robinson-Patman Act makes it unlawful to discriminate in price between purchasers of similar goods when the effect may substantially lessen competition.7Office of the Law Revision Counsel. 15 US Code 13 – Discrimination in Price, Services, or Facilities Courts read “price” broadly enough to include the full package of terms a buyer receives, including credit terms, because more generous financing effectively reduces the buyer’s cost.
A supplier that offers one retailer Net 90 while holding a competing retailer to Net 30 for identical products could face a Robinson-Patman challenge if the disparity hurts competition. The law allows differentials based on genuine cost differences, like lower shipping costs for bulk orders, and it permits price changes in response to market conditions such as perishable goods nearing expiration.7Office of the Law Revision Counsel. 15 US Code 13 – Discrimination in Price, Services, or Facilities A supplier can also match a competitor’s lower price in good faith. If you suspect a competitor is getting substantially better credit terms from the same supplier for the same products, Robinson-Patman is the statute to know.