Most business-to-business transactions are settled weeks after delivery rather than on the day. That gap is a loan from the supplier to the buyer, and it behaves like one.
The supplier is financing the buyer
When goods leave the warehouse before payment arrives, the supplier has funded the buyer's inventory. The money stays tied up until the invoice clears, and the supplier carries that cost meanwhile.
This makes trade credit one of the largest sources of short-term finance available to smaller firms. It is also the least visible, because nobody signs anything resembling a loan agreement.
Suppliers accept the arrangement because refusing it usually means losing the sale. Payment terms compete for business in the same way that headline price and delivery times do.
How the terms get set
Terms are normally expressed as a number of days from the invoice date or from the end of the month. The difference between those two conventions can be several weeks.
New customers often start on shorter terms, or on payment before dispatch, until a payment history exists. Credit limits are then raised gradually as that history accumulates.
Suppliers assess buyers using credit reference agencies, filed accounts and their own ledger experience. The weight given to each source varies by supplier and by jurisdiction.
The cost is inside the price
Early settlement discounts reveal what the credit costs. A discount for paying within ten days rather than thirty is the supplier buying its own money back sooner.
Expressed as an annual rate, the implied cost of forgoing such a discount is often substantial. Buyers who never calculate it are paying for finance without recognising that they are.
Where no discount is offered, the cost sits in the headline price instead. Suppliers who fund long terms price that funding in, whether or not they ever say so.
Where the risk concentrates
The supplier's exposure is the whole unpaid balance, not the margin on it. A single failed customer can erase the profit earned on a long run of completed sales.
That is why credit insurance and hard credit limits exist. Both cap the loss rather than prevent it, and both cost money that reduces the remaining margin further.
Concentration sharpens the problem. A supplier with a handful of large accounts is carrying something closer to a lending book than an ordinary sales ledger.
What happens when payment slips
Late payment is common and rarely announced in advance. The first sign is usually an invoice ageing past its due date while fresh orders keep arriving.
Statutory rights to interest on overdue commercial debt exist in many places, but the rates, notice requirements and enforcement routes differ by jurisdiction and change over time.
Chasing is therefore a commercial decision as much as a legal one. Suppliers weigh the recoverable amount against the value of a customer relationship they may still want.