Trade Credit: Meaning, Types, Examples & RBI Rules
TL;DR - Summary
- What is trade credit? - It is a commercial B2B agreement where a seller allows a buyer to purchase goods or services now and pay at a later date. This arrangement acts as an interest-free loan from the supplier to the customer for a fixed period.
- What are the advantages of trade credit for Indian exporters? - Offering deferred payment terms makes an Indian exporter's business more competitive in international markets. It helps attract larger foreign clients who prioritize cash flow management and working capital optimization.
- What are the disadvantages of trade credit for exporters? - The biggest disadvantages include buyer insolvency, non-payment, and foreign exchange fluctuations that reduce the payment value. The exporter also faces a working capital gap since they incur production costs weeks or months before receiving cash.
- What are the types of trade credit? - Open-account terms, net payment terms, instalment payments, bills of exchange, promissory notes, and deferred-payment letters of credit are the key types of trade credit.
What Is Trade Credit?
Trade credit is a commercial arrangement whereby a seller allows a buyer to pay for goods or services after supplying the goods to them. With trade credit, the buyer is not under pressure to make immediate payment, and therefore, can manage their cash flow better. While the seller uses it as a strategy to increase sales volume.
The seller provides trade credit based on common payment terms. Some of these common payment terms include Net 30, Net 60, and Net 90. This means the buyer must pay the full invoice amount within 30, 60, or 90 days of the invoice date, respectively.
For example, an Indian exporter supplies goods worth $10,000 to a US customer on Net-60 terms. Until the exporter receives payment within the next 60 days, that $10,000 stays on the exporter’s books as a trade receivable. For the customer, it is a trade payable.
You might confuse trade credit with a bank loan; they are different. In trade credit, the seller gives the buyer time to pay for specific goods already delivered. In a bank loan, a bank provides cash that the buyer can use for any business purpose. They can use it for both domestic and international transactions, covering physical goods and professional services.
How Does Trade Credit Work?
Trade credit begins when the buyer and seller agree on a specific credit period and payment terms. After they sign the agreement, the seller supplies the goods or delivers the services and issues an invoice that mentions the payment date.
The buyer receives the delivery without making any payment, but is contractually obligated to pay the total amount by the due date. The seller records the payment as a trade receivable in their books. If the buyer delays payment, the seller follows up and uses contractual remedies such as charging late-payment interest or suspending future orders.
Because the seller agrees to take on the buyer's default risk, they perform a credit evaluation before agreeing to these terms. They validate a buyer’s credibility using trade references, bank references, or third-party data from agencies like Dun & Bradstreet to assess past payment behavior.
Once the credit limit and terms are approved, the seller fulfills the order. But if the buyer’s risk profile exceeds the seller’s threshold, the seller holds the order.
The invoice includes payment terms like payment timeline and discount percentage for early payment.
If you’re an Indian exporter, you must also know the following conditions:
- The currency of the invoice (e.g., USD, GBP, or EUR).
- Export documentation requirements, such as the Shipping Bill or SOFTEX.
- Foreign exchange regulations governed by FEMA.
- Payment realization timelines mandated by the RBI.
- Ensuring payment is received through an authorised banking or payment channel to generate a FIRC.
Practical example of trade credit in action:
A Bangalore-based SaaS agency signs a Net-60 contract with a UK client for £8,000 of product development work. The agency delivers the project on January 1 and issues the invoice the same day. Payment is contractually due on March 1.
During those 60 days, the agency is using its own money to pay employees and cover server costs. When the client pays, the funds arrive in the agency’s Indian bank account in GBP, then the bank converts GBP to INR. By the time the agency can use the money in hand, the total duration extends well beyond the 60-day contractual period.
Note: The RBI rolled back the 15-month repatriation window to 9-month in June 2026. This means, under the FEMA obligations, you must realize the export proceeds within months from the shipment date.
What Are the Types of Trade Credit?
Open-account terms, net payment terms, instalment payments, bills of exchange, promissory notes, and deferred-payment letters of credit are the types of trade credit. Choosing the right type depends on the trust level between the seller and the buyer and the regulatory requirements of the countries involved.
- Open-account terms: The seller ships goods or delivers services without a formal prior agreement, except for an invoice. The buyer makes the payment based on trust and relationship history. This is most common in established B2B relationships.
- Net payment terms (Net 30 / Net 60 / Net 90): Payment is due in full within the specified number of days from the invoice date. The longer the credit period, the higher the cash flow pressure on the seller.
- Instalment or deferred-payment arrangements: The buyer pays the total amount in agreed tranches instead of a single lump sum at the end of the credit period.
- Bills of exchange / trade acceptance: A bill of exchange is a formal legal document signed before or at delivery. The buyer commits to paying the specific amount on a defined date. In return, the seller has a stronger legal claim.
- Promissory note: A promissory note is a legally binding document where the buyer commits to paying a specific amount on a defined date. The buyer initiates it; not the seller.
- Usance/deferred-payment letters of credit: This is a bank-supported arrangement where payment is made at a future date according to the LC terms. This reduces seller credit risk because the bank’s obligation backs the payment.
In India, the RBI has specific rules for trade credit for imports into India. Under the RBI framework, trade credit is financing for imports through two sub-types:
- Supplier’s credit: The overseas supplier allows the Indian importer to pay later.
- Buyer’s credit: A loan is provided to the Indian importer by an overseas lender or financial institution specifically for the import transaction.
These are regulated categories under RBI guidelines and are distinct from the general commercial meaning of trade credit used by exporters.
✅ PRO TIP
If you are new to a foreign client, start with Net 30 rather than Net 60 or Net 90. Shorter credit periods reduce your cash flow gap and give you a chance to assess the client's payment behavior before extending longer terms.
How Do You Record Trade Credit?
Recording trade credit depends on choosing between two primary accounting methods: cash accounting and accrual accounting. Based on the choice, the profitability and cash availability figures also shift.
Cash accounting records transactions only when actual payment occurs. So you get a simple view of actual cash movements, which makes it easier to track what is in the bank. However, it does not reflect the true financial position because credit transactions remain invisible. On paper, your business looks less profitable than it actually is during periods of high sales on credit.
Accrual accounting records transactions when they are incurred, i.e. at the time goods or services are delivered. For trade credit, this means the seller records the invoice as a trade receivable the moment he raises it. This method accurately represents a business's financial position and complies with Generally Accepted Accounting Principles (GAAP). You need more precise record-keeping, but you know the actual gap between revenue earned and cash received.
Larger businesses adopt accrual accounting because it provides a more complete financial picture and is required for regulatory and audit compliance.
For Indian exporters, accrual accounting is relevant. Revenue from a Net-60 international contract is recognized on the invoice date, but the cash does not arrive for at least 60 days. This creates a gap that the business has to manage to pay its own bills in the meantime.
Here’s a table to help you understand how a transaction and payment is recorded based on accrual accounting, assuming a trade credit of Net-60:
| Transaction Stage | Date / Event | Debit Account | Credit Account | Accounting Impact |
|---|---|---|---|---|
| Invoice Issuance | Day 1 (Project Delivery or Shipment) | Accounts Receivable (Current Asset) | Sales Revenue (Income Statement) | In accrual accounting, revenue is recognized immediately; an asset is created for money owed by the buyer |
| Cash Settlement | Day 60 (Foreign Remittance Received) | Cash / Bank Account (Current Asset) | Accounts Receivable (Current Asset) | Liquid cash increases while the outstanding receivable balance is reduced to zero |
What Is the Difference Between Trade Credit, Export Credit and Trade Credit Insurance?
The differences between trade credit, export credit, and trade credit insurance are based on their applicability. Once you know the differences, you will know how each of these tools is effective in both protecting and growing your business.
Trade credit: It is the additional time the seller gives to the buyer to make the payment. The buyer receives the goods or services now and pays later, as per the agreed terms. The seller records the outstanding amount as a trade receivable.
Export credit: This refers to financing provided to an exporter to support the transaction. This includes pre-shipment finance or post-shipment finance. In pre-shipment finance, a bank provides a working capital loan to help the seller take care of procurement and packaging. In post-shipment finance, the seller presents their shipping bill and invoice to the bank, and the bank advances 80% to 90% of the amount instantly.
Trade credit insurance: This is an insurance policy that protects the seller from the risk of non-payment by a buyer. It takes care of credit risk by covering losses from buyer insolvency or protracted default.
Trade finance: Trade finance is a broader category that includes all these instruments, plus letters of credit, bank guarantees, and invoice discounting used to facilitate trade.
Let’s understand how these work together for an Indian exporter:
- An exporter sells to a US customer on 60-day credit terms (trade credit).
- They record the amount as a trade receivable.
- The exporter uses export credit (post-shipment finance) to maintain working capital while waiting for the 60 days to pass.
- The exporter takes out trade credit insurance to limit the financial damage if the US customer fails to pay.
What Are the Advantages and Disadvantages of Trade Credit?
Trade credit offers advantages and disadvantages for both the buyer receiving it and the seller offering it.
Advantages for buyers (the foreign client in an export context):
• They don’t have to make the payment immediately, which frees up their working capital
• After receiving the goods, the buyer can use or resell the goods before paying.
• They can use their own money for procurement. No dependence on banks.
• Gives buyers greater purchasing flexibility with established suppliers.
• If they pay early, the seller might give them a discount.
Advantages for sellers (the Indian exporter):
• Exporters can be more competitive; foreign clients prefer suppliers who offer deferred terms.
• They can attract new customers and retain existing ones
• Support larger orders and repeat business.
• Strengthens long-term customer relationships through trust
Disadvantages and risks for sellers (Indian exporters):
• The buyer may delay payment or default entirely.
• The exporter has already incurred the cost, but has to bear the cash flow pressure until the buyer pays.
• Recovering overdue payments from foreign buyers is costly, time-consuming, and complex across jurisdictions.
• A USD or GBP receivable can change in INR value before payment is received. The exporter may receive less than expected.
• The exporter might face late fees or contractual consequences if they’re also a buyer on the other side of a supply chain.
Disadvantages for buyers:
• The average late fee for delayed payments is 1.5% per month. If the buyer doesn’t pay on time, trade credit becomes expensive quickly.
• Inability to pay on time damages the buyer's credit score or rating and hurts supplier relationships.
• The short-term nature of trade credit means it is not a substitute for long-term financing needs
After raising an invoice, how fast the payment reaches your Indian bank account is a separate problem. If you are already waiting 60 days for a foreign client to pay, you cannot afford slow settlement or surprise deductions on top of that. Skydo gives you real-time visibility, a free FIRC for every inward payment, and a flat fee.
Before you offer extended payment terms, look at the buyer's payment history, the order size, and how much of your revenue rides on that one client. A 90-day term can be perfectly manageable for one customer and create unnecessary exposure for another.
What Is Trade Credit Insurance and Do Indian Exporters Need It?
Trade credit insurance protects a seller against financial losses caused if the buyer fails to pay for goods or services delivered on credit. It is more relevant for exporters using open-account or deferred-payment terms because the exporter carries the buyer’s credit risk for the entire duration of the credit period.
Trade insurance covers commercial risks like buyer insolvency or default. Some policies also cover political risks, such as war, revolution, or new government restrictions that prevent the buyer from transferring funds.
Trade insurance allows exporters to offer credit terms with greater confidence and protects their working capital during long cycles. It also helps exporters manage exposure to overseas buyers whose financial health is difficult to assess from India.
Indian exporters do not automatically need trade credit insurance just because they offer payment terms. Whether it makes sense for your business depends on:
- The total value of your outstanding invoices.
- The length of credit periods (e.g., Net-90 is riskier than Net-30).
- The financial strength of the buyer.
- Buyer’s country risk
- Customer concentration (how much of the total revenue one client represents).
ECGC (Export Credit Guarantee Corporation of India) is the primary provider of export credit insurance in India. They offer products designed to cover export receivables risks.
How Does Skydo Help Indian Exporters Manage Trade Credit Payments?
Skydo simplifies receiving international payments once the trade credit period ends. While Skydo does not provide the credit itself or insure the receivables, it operates on the payment-receipt side. It ensures that once a client pays; the funds reach the exporter quickly and at a predictable cost.
Specific ways Skydo helps:
- Fast international payments: Skydo settles inward remittances within 1 working day. When a client on Net-60 or Net-90 terms pays, the money reaches the exporter's Indian account in 24 hours.
- Free virtual accounts: Exporters get free virtual accounts in USD, EUR, GBP, SGD, AUD, and CAD with local bank account details. Exporters share these details with foreign clients so they can pay via local bank transfer, reducing intermediary fees and friction.
- Transparent, flat-fee pricing: Skydo charges a flat fee based on the transaction value ($19 for under $2,000; $29 for $2,000–$10,000; 0.3% for over $10,000). There are no monthly fees or hidden FX markups.
- Free FIRC for every transaction: Skydo provides a free Foreign Inward Remittance Certificate (FIRC) with every payment. FIRC is mandatory for RBI compliance to prove that export proceeds have been realized.
- eBRC closure assistance: Exporters can link their DGFT account and bulk-upload shipping bills to auto-map IRMs and generate eBRCs. This drastically reduces the manual compliance work.
- EDPMS support: Skydo assists with EDPMS closure, which is necessary when proceeds arrive under deferred terms and must be matched against the original export declaration.
What do trade credits mean?
Trade credit is a commercial arrangement where a seller allows a buyer to pay for goods or services after delivery rather than upfront. Common terms include Net 30, Net 60, and Net 90, which refer to the number of days the buyer has to pay from the invoice date.
How to use trade credit as an Indian exporter or freelancer?
What is trade credit as per Class 11 commerce?
Does trade credit insurance cover all buyer defaults?
What is the difference between supplier's credit and buyer's credit under RBI rules?
What happens if an Indian exporter does not receive payment within 9 months?
What is the cash flow impact of Net-60 or Net-90 trade credit terms for Indian exporters?
