What trade credit means
Trade credit is a supplier delivering now and being paid later.
It is finance, even though nobody calls it that. A supplier who delivers goods on thirty day terms has lent the customer the value of those goods for thirty days, without interest and usually without security.
It is also the largest source of business to business finance in Nigeria and almost everywhere else. Far more Nigerian businesses are funded by their suppliers than by banks.
The risk sits entirely with the supplier. If the customer does not pay, the supplier has delivered goods and has an unsecured claim. That is a worse position than a lender, who at least assessed the borrower and often took security.
Which is why trade credit should be granted deliberately, on documented terms, after some assessment, rather than extended by default because the customer asked.
How it is used
A functioning credit control process has recognisable components.
A credit application form, completed before any credit is granted, capturing the customer's registered name and RC number, registered address, directors, bank details and trade references.
Verification: a CAC search confirming the entity exists and who runs it, and actually calling the trade references.
A credit limit, set deliberately and reviewed, rather than allowed to grow with each order.
Signed terms of trade, covering payment terms, interest on late payment, a right to suspend supply, retention of title and recovery costs.
Retention of title deserves particular emphasis. A clause providing that ownership of the goods remains with the supplier until payment is received puts the supplier in a materially better position if the customer fails, because the supplier may be able to recover the goods rather than ranking as an unsecured creditor.
A personal guarantee from the directors where the customer is a young or thinly capitalised company.
And disciplined collection: invoices issued promptly and correctly, statements sent, and arrears chased on a schedule rather than when somebody remembers.
Key features
- A supplier delivering goods or services before payment
- A form of unsecured finance provided by the supplier
- Should be granted on documented terms after assessment
- Credit limits should be set deliberately and reviewed
- Retention of title improves the supplier's position on customer failure
- A personal guarantee is common where the customer is thinly capitalised
How this works in Nigeria
The Nigerian pattern is that trade credit is extended informally and recovered painfully.
A supplier begins with a small order paid on delivery. The customer asks for terms. The supplier agrees verbally. Orders grow. There is no credit application, no signed terms, no limit and no guarantee. When the customer fails, the supplier has invoices, a WhatsApp history and no security.
Every one of the protections above is easier to put in place at the start of a relationship than in the middle of it. A customer asked to complete a credit application before their first credit order treats it as normal. The same customer asked to sign a personal guarantee after six months of unpaid invoices treats it as an accusation.
Retention of title is the most under used protection in Nigerian supply. It costs nothing to include in terms of trade, and it changes the supplier's position materially where goods are identifiable and still in the customer's possession.
The second Nigerian point is payment terms in a high inflation environment. Extending ninety day terms means being repaid in money worth less than what was supplied, which is a real cost the pricing should reflect. A supplier offering long terms without pricing for it is subsidising the customer twice.
And the third is the corporate payment cycle. Large Nigerian customers pay on their own schedule regardless of your terms. Understanding that cycle, invoicing correctly the first time with the purchase order reference, and confirming receipt of the invoice does more for collection than any clause.
Trade credit vs bank facility vs factoring
Three ways a business funds the gap between supplying and being paid.
Trade credit is finance the supplier provides to the customer. From the supplier's side it is an unsecured exposure. From the customer's side it is free working capital, which is why customers push for longer terms.
A bank facility, such as an overdraft, funds the supplier's own gap. It costs interest and fees, and it is repayable on demand.
Factoring or invoice discounting converts the supplier's receivables into cash immediately at a discount, transferring collection or lending against the book.
A supplier extending long trade credit while funding itself on an overdraft is paying to lend to its customers, which is a common and unexamined position. Shortening terms, or pricing them properly, is usually cheaper than borrowing to fund them.
Limits and risks
Trade credit is unsecured unless the supplier takes retention of title or a guarantee, and most do neither.
It also concentrates risk. A supplier with one large customer on credit terms has an exposure that can end the business if that customer fails.
Credit checking in Nigeria is imperfect. Corporate credit information is limited, and a CAC search confirms existence rather than solvency.
And terms are frequently dictated by the stronger party. A small supplier to a large corporate takes the terms offered, prices them if it can, and manages the exposure.
Worth knowing
Include retention of title in your terms of trade before you extend credit. It costs nothing, it materially improves your position if the customer fails, and it is impossible to add once the goods have already been delivered on open account.
Questions people ask
What is trade credit?
A supplier delivering goods or services before payment, allowing the customer to pay after an agreed period. It is unsecured finance provided by the supplier and it is the largest source of business to business funding.
What should a credit application capture?
The customer's registered name and RC number, registered address, directors, bank details and trade references, verified by a CAC search and by actually calling the references.
What is retention of title?
A clause under which ownership of the goods remains with the supplier until payment is received. It materially improves the supplier's position where the customer fails and the goods are identifiable and still in their possession.
Should I take a personal guarantee?
Where the customer is a young or thinly capitalised company, yes. It is far easier to obtain at the start of a relationship than after six months of unpaid invoices.
How should I set a credit limit?
Deliberately, based on the customer's standing and what you can afford to lose, and reviewed rather than allowed to grow with each order. Limits that drift upward are how a manageable exposure becomes a serious one.
Is long payment terms a real cost?
Yes, especially in a high inflation environment. Being repaid in ninety days means being repaid in money worth less, and a supplier offering long terms without pricing for it is subsidising the customer.