Trade Credit Clubs

Mutual Credit Services has developed the ‘Trade Credit Clubs’ model to integrate shared ledgers and mutual credit into ordinary business-to-business transactions on a decentralised basis, addressing the limitations of prior implementations.


Information about existing bilateral trade credit arrangements (the usual ‘thirty days to pay’ on invoices) is shared within a trusted group, co-ordinating available liquidity for maximum impact with minimal changes to business-as-usual. The tables below (with an arbitrary set of transactions between three parties, and the resulting balances) illustrate the steps in setting up a Trade Credit Club.

The first table shows business-as-usual, with no information sharing between trading partners. Cash flow volatility imposes high working capital requirements (red cells), whilst gridlocks (whereby one business cannot pay because it has not yet been paid) lead to systemic late payment and a high administrative burden from chasing multiple invoices.


The second table illustrates what happens when the trading partners simply submit headline invoice data to a shared ledger. The result is multilateral ‘central clearing’ of obligations, a tool that is widely used in the financial sector. The effects are similar to multilateral obligation set-off: working capital requirements are reduced in proportion to the degree of internal trade and payment gridlocks are resolved. In addition, one payment at the end of the mutually-agreed period (thirty days by default) settles everything, reducing administrative burden. This payment could be in fiat currency, or – as similarly ‘hard’ units use-credit obligations.


A participant’s outstanding balance is equivalent to any other entry in accounts payable/receivable, although this requirement for novation of an obligation to/from the network as a whole distinguishes a shared ledger from multilateral obligation set-off (where all relations remain bilateral between existing trading partners). This means that a shared ledger is only viable in the context of a relatively high-trust group.


The final table demonstrates the further reductions in working capital required for internal trade when participants agree to roll over some portion of their outstanding balances (in this case up to £100 each) at the end of each period. Balance limits can be determined by mutual assessment of productive capacity, risk, and trustworthiness. The European Payments Union, which used central clearing in combination with balance limits in a very similar manner, was key in restoring European trade after the second world war.


Mutually agreeing balance limits is equivalent to pooling and co-ordinating the trade credit that already finances a large proportion of economic activity (particularly between SMEs), and requires – and rewards – additional collaboration. The mutual acceptance of indefinitely rolled-over balances also has the effect of ‘hardening’ some portion of the group’s available trade credit into an internal means of settlement.


In addition to reducing working capital requirements and late payment risk, a key additional benefit of Trade Credit Club membership is therefore shared trade credit risk: since all invoices are paid in mutual credit upon submission, the failure of any given member imposes no immediate loss on any other member. The loss of a member from the club causes a general loss in spendability of the credit, but in a sizeable group, this becomes marginal.


Furthermore, collaboration is rewarded; as members see the overall reduction in risk, they are likely to mutually increase their maximum credit limits, generating increased liquidity and opportunities for ‘internal’ trade. Internal purchasing power is in fact limited only by members’ willingness to trade – there can be no externally imposed credit crunch.


Of course, Trade Credit Clubs cannot get too large, since this would make it hard for any member to assess how trustworthy the group is as a whole. This limits the pool of internal trading partners and thus the benefits of membership. The Credit Commons Protocols shared ledger technology resolves this by enabling groups to trade with each other by federating recursively into groups of groups, supporting scale, diversity, and complexity without imposing unacceptable risk or the costs associated with centralisation.


In the context of a group of groups, the internal willingness to pool trade credit becomes, from the point of view of other member groups, a form of mutual assurance when offering credit to an established group of businesses as a single entity, default would require the collapse of the whole group, rather than a single member. Once again, credit risk is reduced and confidence is increased.


When Trade Credit Clubs are deployed in high-trust, granular trading clusters as a follow-on to multilateral obligation set-off, the balance roll-over mechanism further reduces the need for money to settle obligations within each cluster. Furthermore, computational studies indicate that making only a small amount of this mutual credit – perhaps a few percent of the wider Clearing Clubs trade volume – available outside the clusters is sufficient to settle the majority of all participants obligations.


Community wealth building and circular economy benefits are therefore directly proportional to the credit participants will extend and accept, and hence their trust in each other. The upshot is that collaboration is directly rewarded, providing an economically viable framework for participative governance in a renewed commons.

Further reading

Explaining Mutual Credit to Small Business Owners, Dave Darby, lowimpact.org.

Mutual Credit Services - keeping communities alive after COVID: Trade Credit Clubs and credit clearing, Dave Darby, lowimpact.org.

Pirrong, C., The Economics of Central Clearing: Theory and Practice, International Swaps and Derivatives Association, 2011.

The End of Finance, Massimo Amato and Luca Fantacci, 2012, Polity Press.