# Why 95% of Indian B2B Trade Runs on Credit (And What It Costs)

Ask a wholesaler in Delhi's Sadar Bazaar how his customers pay, and he'll laugh at the question. Almost nobody pays cash. Goods move on udhaar — informal credit extended seller-to-buyer, settled whenever money arrives. Estimates consistently put credit-based transactions at the overwhelming majority of Indian B2B trade — often cited around 95%. This isn't a glitch in the economy. It's the economy's operating system. And it quietly taxes everyone in it.

How India's B2B credit system actually works

Formal instruments — letters of credit, bill discounting, supply-chain finance — serve large corporates. Below that layer, trade runs on:

  • Open account credit: "pay me next month" agreed over a phone call
  • Ledger-based running balances: buyers settle lump sums against accumulated invoices
  • Relationship enforcement: credit stops when trust breaks; there's rarely a contract

A kirana buying from a distributor pays after 15–30 days. A distributor buying from a brand pays after 30–60 days. Each layer finances the next — with the manufacturer ultimately bankrolling the entire chain.

Why credit dominates: five structural reasons

1. Cash conversion cycles don't align

Retailers sell inventory over weeks but must pay distributors sooner. Credit bridges the gap between buying stock and selling it.

2. Trust infrastructure is thin

Contract enforcement through Indian courts takes years. Informal credit backed by relationship and reputation is simply more practical than litigation.

3. Formal credit hasn't reached the tail

Millions of small traders lack audited financials or collateral, so banks decline them — leaving sellers as the only lenders willing to serve.

4. Credit is a competitive weapon

Distributors win or lose retailers based on payment terms as much as price. Offering 45 days instead of 30 can be the whole pitch.

5. It's self-reinforcing

Because everyone extends credit, everyone expects it. A seller demanding upfront payment concedes a disadvantage competitors will exploit.

The hidden cost — who really pays

Informal credit looks free. It isn't. The costs are just distributed invisibly:

  • Working capital trapped: a mid-size FMCG distributor carrying ₹2 crore in receivables at 60 days effectively lends ₹2 crore interest-free — capital that could earn 12–18% elsewhere. That's ₹24–36 lakh a year in opportunity cost
  • Prices marked up: sellers bake financing and default costs into prices. Cash buyers subsidise credit buyers
  • Default losses: industry estimates routinely put bad debts at 1–3% of B2B sales in credit-heavy channels — on ₹50 crore of sales, up to ₹1.5 crore written off
  • Growth ceilings: sellers ration growth by their own balance-sheet strength, not market demand. The distributor who could sell ₹10 crore caps at ₹6 crore because he can't finance more receivables
  • GST and compliance friction: reconciling hundreds of unsettled invoices complicates input credit claims and audits

The shift: formalising trade credit

What's changing in 2026 is not the appetite for credit but its plumbing:

  • Data: GST filings give lenders live visibility into a trader's real turnover — no audited statements needed
  • Instant underwriting: GSTIN-based checks approve credit in minutes, making formal credit competitive with "udhaar" on speed
  • Embedded distribution: credit is offered inside marketplaces, accounting apps, and checkout flows rather than at bank branches
  • Automated collections: eNACH/UPI Autopay make structured repayment reliable at small-ticket scale
  • Regulatory clarity: RBI's LSP framework lets fintechs partner with NBFCs/banks legally, unlocking capital for this segment

Vendors are also restructuring deals directly: instead of extending unsecured 60-day terms, they let buyers pay monthly through financing rails while collecting upfront themselves. Platforms like KredFlow apply this to software contracts; the same logic is spreading across equipment, media, and services.

What businesses should do about it

If you're a seller:

  • Price credit explicitly: charge differently for 0/30/60-day terms
  • Cap exposure per buyer using GST and bureau data, not gut feel
  • Move chronic late-payers to financed monthly structures so you still collect upfront

If you're a buyer:

  • Recognise that supplier credit isn't free — early-payment discounts may beat stretching terms
  • Build formal credit history (bureau-reported facilities) while times are good; credit is cheapest before you need it
  • Use instalment financing for large purchases to protect working capital without straining relationships

Conclusion

India's B2B economy runs on credit because, for decades, there was nothing else — banks couldn't see small businesses, and courts couldn't enforce contracts fast enough. That rationale is dissolving. With GST-powered underwriting, embedded distribution, and automated collections, formal credit can now match informal credit on speed and beat it on cost and scale. The 95% won't disappear overnight — but who supplies that credit, and at what price, is being rewritten right now.