As a small or medium-sized enterprise (SME) in South Africa, managing cash flow is often the difference between thriving and merely surviving. With economic pressures like inflation at 2.8% in mid-2025 and private sector credit growth at 5% year-on-year in May, businesses are turning to flexible commercial financing options.
Trade credit – a common form of business financing where suppliers allow buyers to purchase goods or services and pay later – plays a key role in this. It’s widely used in supply chains, from manufacturers extending trade credit terms to retailers to wholesalers supporting small shops.
In this guide, we’ll break down what trade credit is, its advantages and disadvantages, how to calculate it, and what it’s best used for. We’ll also look at emerging trends in trade credit financing, including the rise of buy now pay later (BNPL) and invoice finance, and how alternatives such as Lula’s funding solutions can help minimise risks and boost cash flow.
What is Trade Credit?
Trade credit is a type of short-term financing agreement between businesses, where a supplier (seller) provides goods or services to a buyer without requiring immediate payment. The buyer agrees to pay at a later date, typically within 30 to 90 days, based on predefined terms.
This formal agreement is an interest-free loan from the supplier to the buyer, helping the buyer manage working capital while allowing the supplier to build loyalty and increase sales.
How Trade Credit Works
Trade credit works by suppliers evaluating the buyer’s credit rating and credit history to determine eligibility and set credit limits – the maximum amount of deferred payment allowed.
In South Africa, trade credit is common in industries like retail, manufacturing and agriculture, where suppliers extend terms to help buyers stock up without upfront cash. For example, a hardware store might receive building materials from a wholesaler on “net 30” terms, meaning full payment is due 30 days after delivery.
If terms include discounts, such as 2/10 net 30, the buyer gets an early payment discount of 2% for paying within 10 days. In the retail sector, where credit growth is steady but BNPL options are rising, trade credit management helps SMEs compete with larger chains by deferring delayed payments.
Unlike traditional bank loans, trade credit doesn’t involve formal applications or interest charges, but it does carry risks, especially for suppliers facing late payments in a volatile economy.
How to Calculate the Cost of Trade Credit
Calculating the cost of trade credit is essential to understand if it’s truly “free” or if skipping discounts incurs hidden expenses. The formula for the annualised cost of foregoing a discount is:
Cost of trade credit = [(discount percentage) / (100 – discount percentage)] × [360 / (payment days – discount days)]
For instance, with 2/10 net 30 terms:
• Discount percentage = 2%
• Payment days = 30
• Discount days = 10
Cost = (2 / 98) × (360 / 20) ≈ 36.7%
This means delaying payment beyond 10 days effectively costs your business about 36.7% annually in lost savings, higher than many loan rates. Late payments can add penalties, calculated as: Late payment penalty = (invoice amount) × (penalty rate) × (days late / 365).
For a R10,000 invoice with a 1.5% monthly penalty and 15 days late, that’s roughly R62 in extra costs. Always factor these in to avoid eroding profits, especially with South Africa’s trade finance market expected to grow at 5.7% CAGR from 2025 to 2030.
What is Trade Credit Best Used For?
Trade credit is best used for short-term cash flow management and financing routine purchases without depleting. For buyers, receiving trade credit is ideal when you need to buy inventory now but expect revenue soon, e.g. stocking shelves before a busy season. It frees up cash for growth investments, like marketing or hiring, and acts as a bargaining tool in supplier negotiations.
Trade Credit Examples
In agriculture, farmers might use it to acquire seeds or fertiliser ahead of planting, paying after harvest. For suppliers, it’s effective for attracting price-sensitive customers and increasing market share, especially in competitive sectors. However, it’s most suitable for businesses with strong relationships and reliable payment histories. If cash flow is unpredictable, alternatives may be better to avoid defaults.
Pros of Trade Credit
Trade credit offers several benefits and helps improve accounts receivable balances, particularly for small businesses and SMEs in South Africa, navigating economic pressures.
• Improved cash flow: Buyers can defer payments, preserving capital for operations or emergencies, crucial in a market with rising costs and a positive credit-to-GDP gap indicating above trend credit extension. This extends accounts payable, allowing businesses to hold onto cash for longer.
• No interest charges: Unlike loans, it’s often interest free if paid on time, making it a cost effective short-term option.
• Builds relationships: Suppliers gain loyalty and repeat business; buyers access better trade credit terms over time, fostering long-term partnerships.
• Easier access: No lengthy approvals – just negotiated trade credit terms, ideal for quick needs in fast-paced industries like manufacturing.
• Growth enabler: Helps scale without upfront cash, e.g., expanding inventory during peak demand or entering new markets.
Trade credit can be a powerful tool for SMEs to maintain operations without immediate financial strain,” says Thomas McKinnon, Chief Growth Officer at Lula.
Cons of Trade Credit
Despite its appeal, trade credit has drawbacks that can impact both parties.
• Risk of bad debt: Suppliers face non-payment, straining their finances – a growing concern with South Africa’s economic challenges.
• Cash flow strain for suppliers: Delayed revenue can hinder paying their bills or investing.
• Hidden costs: Forgoing discounts or incurring late fees can make it expensive, as shown in the calculations above.
• Administrative burden: Tracking invoices and chasing payments adds time and costs.
• Limited flexibility: If suppliers tighten terms during downturns, buyers may struggle to access goods or services.
“Many SMEs struggle with the hidden costs of offering trade credit to customers. In South Africa’s context, where consumer credit pressures are rising and gambling risks are influencing retail credit trends, these risks can amplify,” says McKinnon.
Managing Trade Credit Risks
To mitigate these cons, businesses can adopt strategies like credit checks on buyers, setting clear terms and using technology for invoice tracking. Suppliers might require partial upfront payments or offer incentives to pay earlier. Buyers should monitor their cash flow forecasts to avoid over reliance. In volatile times, trade credit insurance is gaining traction, covering up to 90% of losses.
“Strategies to manage trade credit risks are essential for sustainable growth. For SMEs, partnering with fintechs for real-time insights can prevent bad debt accumulation,” says McKinnon.
Trade Credit and the Cash Conversion Cycle
Trade credit directly influences the cash conversion cycle (CCC), which measures the time it takes to convert inventory investments into cash. For buyers, extended payment terms increase days payable outstanding (DPO), shortening the CCC and improving liquidity.
However, for suppliers, it lengthens days sales outstanding (DSO), potentially extending their CCC and tying up capital. In South Africa, where economic risks like trade tensions persist, optimising CCC through balanced trade credit is key to resilience.
Trade Credit Trends
Trade credit arrangements are evolving, driven by technology and economic shifts. In South Africa, with inflation at 4.5% and interest rates potentially stabilising, businesses are seeking safer alternatives amid a mixed credit outlook. The trade credit market is set for steady growth, but risks from delinquencies and debt trajectories persist.
Key trends include:
• Point-of-sale financing by fintech companies: Instant options at checkout reduce reliance on traditional terms, minimising default risks and aligning with Africa’s fintech boom in sustainability and innovation.
• Accounts receivable financing or invoice finance: Sellers convert unpaid invoices into cash quickly – learn more about access to invoice finance. This trend helps suppliers manage liquidity in volatile markets, with uptake rising as credit-active consumers reach 28.32 million.
• Trade credit insurance: Protects against non-payment, with uptake rising amid fraud and economic uncertainty.
• SME-focused alternative finance: Platforms offer flexible funding, including AI-driven assessments for faster approvals, supporting the continent’s embrace of regional trade and financial innovation.
These trends minimise risks for buyers and sellers by improving predictability and speed. For instance, BNPL’s rise in retail credit helps buyers avoid high-cost delays while sellers get faster payments. For businesses offering trade credit, alternatives like insurance or financing can safeguard cash flow.
For those unable to secure terms, options like buy now pay later can bridge gaps.
Revolving Capital
Lula’s business funding stands out as an SME-focused alternative, helping minimise trade credit risks. Our Lula Revolving Capital Facility provides a flexible line of up to R5 million, which can be tapped into when needed. Funds can be available within as little as 24 hours and there are no early repayment penalties. It’s unsecured, based on real-time banking data, and ideal for creating a cash reserve.
Alternatives to Trade Credit
“Alternatives to trade credit, like our Revolving Capital Facility, allow businesses to improve cash flow without the risks of extended terms. With potential economic growth on the horizon, these tools can help SMEs maximise profits. Businesses relying on supplier terms can use it to pay upfront for discounts, while those offering credit can use it to cover gaps from late payers,” says McKinnon.
Explore the Lula Revolving Capital Facility or our Lula Capital Advance funding for quick business funding advances.
For tips on handling repayments, read about effective ways to manage repayments on your capital facility.
Making the Right Choice for Your Business
Deciding on trade credit requires evaluating your SME’s cash flow stability, industry risks, and growth plans related to each business transaction. In 2025’s evolving landscape, with technology-driven trends and targeted credit growth, blending trade credit with alternatives like Lula’s solutions can optimise outcomes.
Ready to explore alternatives? Apply for our Revolving Capital Facility today and take control of your cash flow. For more insights, visit our SME Hub.
