B Com Exam > B Com Videos > Business Economics & Finance > Trade Credit - Financial Planning and Administration, Business Economics & Finance
Trade Credit - Financial Planning and Administration, Business Economics & Finance Video Lecture | Business Economics & Finance - B Com
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FAQs on Trade Credit - Financial Planning and Administration, Business Economics & Finance Video Lecture - Business Economics & Finance - B Com
| 1. What is trade credit? |  |
Ans. Trade credit is a type of financing arrangement between two businesses, where one business (the supplier) allows the other business (the buyer) to purchase goods or services on credit and pay for them at a later date. It is a common practice in business transactions and is often used to improve cash flow and manage working capital.
| 2. How does trade credit work? | |
Ans. Trade credit works by allowing a buyer to make purchases from a supplier without making an immediate payment. The supplier extends credit to the buyer, allowing them to pay for the goods or services at a later date, usually within a specified period, such as 30 days or 60 days. The buyer will receive an invoice from the supplier, stating the amount due and the payment deadline. The buyer can use this credit period to sell the goods or services and generate revenue before making the payment to the supplier.
| 3. What are the benefits of trade credit? | |
Ans. Trade credit offers several benefits to businesses. Firstly, it provides flexibility in managing cash flow, as businesses can delay payment for purchases and use available funds for other expenses or investments. Secondly, it can help build a good relationship with suppliers by demonstrating trust and reliability in making payments. Additionally, trade credit can also serve as a short-term financing option, eliminating the need for immediate external funding. Lastly, it allows businesses to take advantage of discounts offered by suppliers for early payments.
| 4. Are there any risks associated with trade credit? | |
Ans. Yes, there are risks associated with trade credit. One of the main risks is the potential for late or non-payment by the buyer, which can strain the relationship with the supplier and lead to additional costs such as penalties or interest charges. There is also a risk of overextending credit to customers who may not be able to pay, resulting in bad debt losses. Additionally, relying heavily on trade credit can also limit a business's access to other forms of financing, as it may negatively impact creditworthiness and borrowing capacity.
| 5. How can businesses effectively manage trade credit? | |
Ans. Businesses can effectively manage trade credit by implementing certain strategies. Firstly, it is important to establish clear credit policies and procedures, including credit limits, payment terms, and credit application processes. Regularly reviewing and monitoring customer creditworthiness can help identify potential risks and ensure credit is extended to reliable customers. Implementing effective accounts receivable management practices, such as timely invoicing, follow-ups on overdue payments, and early collections, can also help minimize late or non-payment issues. Finally, maintaining good relationships with suppliers and negotiating favorable credit terms can contribute to successful trade credit management.
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Nov 16, 2024 Last updated |
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