If you've ever been involved in the world of food distribution, it's a business that moves incredibly fast. Timing, trust, and cash flow can matter as much as the freshness of the produce. Industry margins are some of the thinnest around, and perishable goods leave minuscule room for delay. This is why payment methods, specifically trade credit vs. cash-on-delivery (CoD), matter so much. In this guide, we'll break down how these things work and who or what they might be good for.
What is trade credit in food distribution?
Trade credit is an arrangement where suppliers allow buyers to purchase now and pay later, usually within 30, 45, or 60 days. It’s common in many industries, but in food distribution, it carries extra importance. Perishability, short shelf lives, and fluctuating demand are some of the challenges faced by the food distribution industry. Buyers will always want stock on hand to sell, no matter what, and trade credit makes that happen. With trade credit, the suppliers act as financiers, offering an interest-free bridge until the payment is received or due. It allows buyers to get a bit of breathing space and allows them to sell goods and collect revenue without having to worry about immediately settling invoices.
Let's break down an example of how trade credit works with a supermarket chain:
- A supermarket chain places a £30,000 order of frozen goods on Net 45 terms.
- The supplier ships immediately and records the receivable.
- The supermarket sells the stock gradually, collecting payments from customers.
- By day 45, it pays the supplier, using proceeds from sales rather than cash reserves.
What is cash-on-delivery, and when is it used?
Cash-on-delivery (CoD) requires buyers to pay as soon as goods arrive. It's the most common way transactions are made in the world of supply chain logistics. It’s a “no cash, no goods” model, so payment needs to be made before the goods are received. Payment is typically in cash, cheque, credit card, or an immediate bank transfer at delivery, not only cash.
CoD is still very common in food distribution because of the perishable nature of the goods. Many times, because food distribution involves such a vast web of people, suppliers need some sort of assurance as they are dealing with new customers with no track record. CoD protects suppliers from the risk of non-payment. It also provides a safety net for transactions that involve high-risk markets, where institutional trust is in short supply.
Imagine a dairy supplier delivering £10,000 worth of milk and cheese to a local retailer. The truck only unloads once payment is handed over. The supplier immediately secures cash, while the buyer bears all the upfront risk. CoD builds security for suppliers, but it can slow down buyers, especially small grocers and restaurants that don’t have large cash reserves.
{{iwoca-pay-cta="/components"}}
Comparing trade credit and cash-on-delivery for food suppliers
Both Trade credit and COD affect cash flow, trust, and growth prospects, but they do so in opposite ways. Trade credit helps buyers preserve liquidity by allowing them to sell goods before paying. This supports larger orders and faster scaling, and in the food distribution industry, where margins are thin, scaling matters. The trade-off is that suppliers shoulder the risk of delayed or missed payments and must run invoicing and collections processes.
On the other end, cash-on-delivery gives suppliers immediate certainty; they’re paid the moment stock changes hands. It's the type of business that's been done since the dawn of human civilization; I give you this in exchange for this right now. This helps secure their working capital and removes the receivables risk. Buyers, on the other hand, are loath to pay larger and larger sums, and thus, scalability with CoD is not as prevalent.
The table below gives a side-by-side comparison of the two and how they differ.
| Factor |
Trade Credit |
Cash-on-Delivery |
| Cash flow |
Buyers preserve liquidity, paying after resale |
Suppliers secure immediate cash; buyers’ liquidity is strained |
| Risk |
Supplier risks: delayed or missed payments |
Buyer risks tying up cash before earning revenue |
| Trust |
Signals long-term relationship and reliability |
Useful for first-time deals or volatile markets |
| Complexity |
Requires credit checks, invoicing, and collections |
Straightforward: payment at delivery, no AR processes |
Advantages of trade credit
Trade credit is more than a delayed payment term; it offers a lifeline for businesses that might otherwise be struggling. Cash flow is important for any business, and trade credit allows businesses to scale while strengthening client relationships.
| Advantage |
Why It's an Upside |
Example or Impact |
| Boosts buyer liquidity |
Deferring invoices frees up working capital for operations. |
£8,000 invoice deferred for 30 days lets a restaurant generate £12,000 in sales and cover wages, rent, or utilities. |
| Supports growth |
Access to credit encourages larger and more frequent orders. |
Wholesaler saw Net 30 customers place orders 15–20% larger than CoD buyers. |
| Encourages loyalty |
Flexible terms strengthen supplier–buyer relationships. |
Buyers stick with suppliers who offer credit, reducing churn and increasing repeat volume. |
The comparison below shows how trade credit lifts buyer purchasing power. Customers using CoD averaged orders of about £6,800, while those on Net 30 reached closer to £8,200, a 20% increase. The ability to delay payment frees up working capital, which translates directly into larger, more frequent orders.
Drawbacks of trade credit
While trade credit supports growth, it can also expose suppliers to risk and strain. The three main challenges are delayed payments, higher admin requirements, and mismatched cash cycles.
| Drawback |
Why It's a Downside |
Example or Impact |
| Credit risk |
Late or unpaid invoices tie up supplier capital. |
A single £20,000 late invoice equals several days’ turnover. On average, 10–15% of SME receivables are overdue by more than 30 days. |
| Admin overhead |
Requires credit checks, invoicing, and collections management. |
Many small distributors hire a dedicated AR clerk, adding £25k–£30k annual cost to operations. |
| Cash-flow mismatch |
Suppliers often pay their own vendors before receiving customer payments. |
Outflows of £8,000 are due by Day 14, but inflows may not arrive until Day 30–60. Creates a 2–3 week funding gap often covered by overdrafts or invoice finance. |
The net position stays negative through Day 14 because supplier cash goes out before full buyer cash comes in. Under Net 30, the position turns clearly positive only when the invoice is settled. If terms extend (Net 45/60), the funding gap lasts longer.
{{find-out-iwocapay-cta="/components"}}
Advantages of cash-on-delivery
Although trade credit often gets the spotlight, cash-on-delivery (CoD) remains a vital tool in food distribution. It gives suppliers immediate security, simplifies transactions, and is particularly valuable when dealing with highly perishable products. For smaller producers or businesses without access to formal financing, CoD can be the most reliable way to keep cash moving and risk under control.
| Advantage |
Why It's an Upside |
Example or Impact |
| Immediate settlement |
Suppliers receive payment on delivery, eliminating receivable risk. |
Cash arrives on Day 0, vital for smaller producers without bank finance. |
| Simpler operations |
No need for credit checks, scoring, or AR processes. |
Transaction is clean: invoice raised, cash received, stock delivered. |
| Ideal for perishable goods |
Upfront payment protects against spoilage or disputes after delivery. |
If a £5,000 strawberry load spoils in transit, the supplier has already secured payment. |
Drawbacks of cash-on-delivery
While CoD protects suppliers, it also creates some challenges for buyers. The requirement to pay upfront can drain liquidity, limit competitiveness, and even disrupt deliveries if cash isn’t immediately available. These drawbacks explain why many food businesses prefer more flexible arrangements once trust is established.
| Drawback |
Why It's a Downside |
Example or Impact |
| Buyer strain |
Forces customers to part with cash before sales revenue arrives. |
Paying £8,000 upfront may leave only £2,000 in reserves, making payroll or rent harder to cover. |
| Competitive disadvantage |
Strict CoD terms push buyers toward rivals offering Net 30 or more flexible options. |
Surveys show “payment flexibility” ranks in the top three supplier selection factors. |
| Potential delays |
Deliveries can be stalled if the buyer doesn’t have cash at hand on delivery day. |
Stock sits in trucks or warehouses, increasing spoilage risk and disrupting supply chains. |
Choosing the right payment method for your food business
Choosing the right payment method for your business might be one of the most important decisions you can make. Especially if you are just starting out or dealing with small margins, a proper payment structure is paramount. Business owners should heed the following advice.
When to use trade credit
Trade credit works best for established customers who have proven they can pay on time. In business, a track record is everything, and those businesses with a sparkling track record will always get the best terms. For example, a large restaurant group ordering £20,000 of meat each week may need credit terms to keep their kitchens running smoothly. Giving them 30 days to pay allows them to collect revenue from diners before settling their bill. This approach not only secures their loyalty but also encourages bigger orders that fuel the distributor’s own growth.
When to use CoD
Cash on delivery is best for new or higher-risk clients. Think of a small Fish n Chips shop just opening its doors, ordering £2,000 worth of produce for the first time. The distributor doesn’t yet know if the shop's sales will cover the bill, so CoD protects against a possible default. CoD is also common for ultra-perishable products like seafood, where both sides prefer immediate settlement.
The hybrid approach
A hybrid model blends caution with flexibility and is more of a transition from CoD to trade credit than anything. For instance, a bakery might start by paying COD for flour and butter during its first six months of business. Once it consistently shows sales and timely payments, the distributor may shift the bakery to Net 15 or Net 30 credit terms. This gradual move rewards reliability while still keeping the risk in check and the bread fresh.
Article Sources
- UK Government – Food Statistics in Your Pocket
- Defra / ONS – Agriculture in the United Kingdom 2024: Chapter 14 – The Food Chain
- UK Export Finance – Annual Report and Accounts 2024/25
- UK Export Finance – Working Capital Schemes / Working Capital Products & Services
