Supplier credit

Supplier credit is a form of short-term financing in which a tradesperson or building materials supplier grants the builder or property owner a payment term for services rendered or materials delivered-the contractor effectively defers its claim and thus acts as a lender. In the real estate sector, supplier credit is most common in renovation and refurbishment projects, where tradespeople grant payment terms of 14 to 60 days. Although this credit often appears interest-free, discount agreements frequently contain hidden interest equivalents of up to 36% per annum.

How does supplier credit work in practice?

If a property owner commissions a contractor to renovate their rental property, the contractor issues an invoice with a payment term-for example, “payable in 30 days net, or within 10 days with a 2% discount.” If the property owner takes full advantage of the payment term, they forgo the discount: this lost discount corresponds to an implicit interest rate. With a 2% discount and a remaining term of 20 days, this results in an effective annual interest rate of around 36%.

Supplier credit is therefore often more expensive than a short-term overdraft facility, despite its apparent lack of cost. The basic rule is: If the discount rate (in %) is higher than one-twentieth of the annual overdraft interest rate (in %), it is worth taking the discount and financing the remainder through a short-term bank loan. In times when bank interest rates for overdraft facilities range from 8% to 12% per annum, a 2% discount is virtually always more attractive than the payment term.

Tax Treatment in the Real Estate Sector

For landlords, supplier credit is relevant in two respects: First, the tradespeople’s services themselves are deductible as income-related expenses or maintenance costs. Second, it is irrelevant for tax purposes whether the invoice is paid with a discount or in full-the deductible costs correspond to the amount actually paid. With a discount, the deductible amount is therefore reduced slightly. In the accounting of real estate companies and limited liability companies (GmbHs), supplier credit is recorded as a trade payable (current liability).

Under the income-surplus accounting method (EÜR), which many private landlords use, the cash flow principle applies: The expense is deductible in the tax year in which the payment is actually made. This means: Anyone who receives a contractor’s invoice shortly before the end of the year and does not pay until January of the following year defers the tax deduction to the following year.

Distinction from Other Forms of Financing

A supplier credit differs from a traditional bank loan in that no financial institution is involved and no formal credit check takes place. It is also not a down payment model: With a down payment, the buyer pays in advance; with a supplier credit, the tradesperson or supplier pays in advance. Compared to construction financing, these are always short-term amounts; long-term renovation projects are typically financed through bank loans or KfW promotional loans.

Under construction law, it should be noted that, pursuant to Section 650f of the German Civil Code (BGB), the contractor has the right to demand a contractor’s security-an instrument that suppliers are increasingly using for larger projects. This security does not have to be offset against the supplier credit, but it does affect the builder’s liquidity planning.

Practical Tip for Homeowners in Nuremberg and Franconia

Nuremberg-based tradespeople typically offer payment terms of 14 to 30 days. Those who hire multiple trades simultaneously-for example, painters, plumbers, and electricians for a complete renovation-may face a short-term liquidity gap if several invoices become due at the same time.

Our tip: Review the discount terms for each trade and compare the implied interest rate with an overdraft line of credit from your bank. For larger renovation projects-in the Nuremberg area, experience shows this applies to budgets of 50,000 euros or more-a KfW investment loan (Federal Funding for Efficient Buildings-BEG) or an LfA promotional loan is often worthwhile, as it is available in advance and offers more favorable terms than taking out multiple supplier credits. We’d be happy to connect you with financial advisors who are familiar with KfW and LfA funding for renovation projects in the region.

Frequently Asked Questions

Is the supplier credit really free?

Only if no discount is available. In most cases, invoices include a discount provision-those who take full advantage of the payment term forgo the discount and implicitly pay interest. This can effectively be higher than bank interest rates. Always calculate the implicit interest rate: discount rate (%) × 360 / days until the discount due date.

How do I account for an outstanding supplier credit in my real estate LLC?

Outstanding invoices are reported as current trade payables on the balance sheet. For tax purposes, the expense is recognized only at the time of payment (cash basis under the income surplus method) or at the time of economic occurrence (accrual basis for GmbHs subject to accounting requirements).

As a landlord, can I claim the lost discount for tax purposes?

No-only the amount actually paid is tax-deductible. Lost discounts are not deductible expenses but rather imputed figures that should be taken into account in profitability planning. For tax optimization, we recommend always claiming the discount-the tax benefit from the slightly lower expense outweighs the costs of a short-term loan.

Supplier Credit and the Construction Tradesman’s Lien

One aspect property owners should be aware of when hiring tradespeople: The construction tradesman’s lien under Section 650e of the German Civil Code (BGB) grants the contractor the right to demand the creation of a security mortgage on the client’s property to secure their claim for payment. This right arises upon the commencement of work. If the owner fails to pay the contractor’s invoice-possibly after exhausting the supplier credit-the contractor may exercise this right and have a security interest registered on the property. In practice, this step is rarely taken, but awareness of it increases the willingness to pay on time.

For owners who commission multiple trades simultaneously, we recommend careful liquidity planning: Create a payment schedule that summarizes the due dates of all contractor invoices and takes into account the available line of credit. For larger renovation projects in Nuremberg-such as a complete renovation of an apartment building with budgets starting at 100,000 euros-a forward-looking financing structure using KfW or LfA funds is generally more sensible than gradually exhausting supplier credit lines.

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