Written by Lars Holdgaard, Founder of Debitura

Longer payment terms look administrative, but they transfer funding, risk and work to the supplier.

Suppose that two buyers purchase a commodity for the same sum of money (£50,000). One of the customers made the payment in 30 days while the 2nd customer negotiated a payment plan for 60 days and has made the payment as planned. Despite the similar invoice amounts the different timings mean two different situations in finance.

For that extra month, the supplier has delivered value without receiving payment. This is the trade credit: a supplier allows a customer to receive goods or services before paying for them. According to the Longitudinal Small Business Survey report, 47% of small business employers provided trade credit in 2024, and 57% of them admitted that late payments have become a problem for them.

Thus, payment terms are not just a part of an invoice; they are something that goes into the price of the commodity, even if the funding charges are kept in secret.

Price is a Combination of Three Factors

By providing the credit the supplier experiences at least three types of costs from an economic point of view.

The first one is financing. All cash is tied in receivables and this cash cannot be used elsewhere. 

The second one is the risk of loss. The majority of the customers will pay, but some will not pay. A fair price in terms of credit limits will take into account the non-payment risk as well as the amount of money that may be lost otherwise.

Finally, the third cost is management efforts. In this regard, the personnel have to send reminders, settle disputes and manage the payments. These hours are a real cost, even though they never appear as a separate line on the invoice.

Thus, while the buyer accepts any terms from suppliers as a benefit, the supplier sees this as painful money costs (funding), risks and a lot of work.

Calculating the Cost of Additional Days

The first element can be easily calculated using the formula below:

Financing cost = invoice amount × financing rate × extra days / 365.

For instance, when the invoice is worth £50,000, the annual interest is 8% and days are 30, we get:

£50,000 × 0.08 × 30 / 365 = £329.

However, this is only a small part of the whole cost calculation. “No interest charged” does not necessarily mean “no funding cost”.

It can be said that this formula can be used in order to know whether the discount for the early payment is cheaper than waiting for payment. If the discount is more expensive than necessary funds, the discount can be considered unattractive.

Bargaining Power Means Who Lends Money

Trade credit appears to be the agreement made fairly between buyer and seller, in practice however, the two parties often have unequal bargaining power.

A large customer may demand a longer period of payment as a condition for placing orders. A small supplier may comply because losing the buyer feels riskier than financing it. Hence, the result is an implicit loan going from the party with less liquidity and bargaining power to the party with more.

The 2025 report of the EU Payment Observatory showed that bigger companies are more likely not to comply with the payment terms in all analysed years. It also showed that longer payment terms were followed by longer payment delays in 87% of cases.

This is an association, not proof that longer terms cause delays, but it does challenge the assumption that longer terms are harmless. 

Cross-Border Trade Introduces New Information Costs

When operating in a domestic repeat buyer-seller situation, the supplier has already gathered necessary information on the buyer's payment habits and what the associated costs would be, should a problem arise. However, cross-border trade introduces uncertainty because the parties involved may be using different currencies, documentation and approval processes. The legal entity which places an order may be different from the entity which will ultimately pay for the goods. Moreover, the finance department may not have the same information about local payment habits or the existing routes of action in case the invoice is not paid.

These transaction and information costs do not mean that working with every foreign buyer is dangerous. It means that the same 60-days payment term can hide very different risks. 

The economic answer to this problem is not to ban cross-border trade, but to collect information, clarify who the contracting and paying parties are in advance and determine how much unsecured credit the supplier will be willing to grant.

In case a bill is overdue, the supplier should be aware of the possible support for recovering unpaid B2B invoices in the UAE, while recognising that no recovery route guarantees payment.

Five-Step Trade Credit Policy

An effective credit policy can remain simple.

1. Set A Benchmark - Decide on default trading terms and credit limit to create a benchmark.

2. Price The Exception - When the buyer asks for an extended term, price the extra days.

3. Verify Payment Behaviour - Before granting credit, check the available payment behaviour data.

4. Separate Sales From Credit Authority - The sales department has incentives to generate revenue, so that  someone else should have the ability to make decisions about cash exposure and risks involved.

5. Define The Exit Before The Delay - Set clear triggers in advance for stopping credit or escalating a dispute.

The Amount On An Invoice Is Not The Only Aspect

Trade credit can both help with increasing sales and strengthening customer relationships. But, at the same time, it may force the supplier to bear the funding and payment risks.

The solution is not to eliminate payment periods completely, but to treat them as economic variables that need to be calculated. For example, two £50,000 invoices are not equivalent if one ties up cash for an extra month. 

Author bio

Lars Holdgaard is the founder of Debitura and has 10+ years of experience across debt collection, accounts receivable, technology and startups. He studied at the IT University of Copenhagen and the Technical University of Denmark.