Trade Credit - Financial Planning and Administration, Business Economics & Finance | Business Economics & Finance - B Com PDF Download

Meaning:

Trade credit is an important external source of working capital financing. It is a short-term credit extended by suppliers of goods and services in the normal course of business, to a buyer in order to enhance sales. Trade credit arises when a supplier of goods or services allows customers to pay for goods and services at a later date. Cash is not immediately paid and deferral of payment represents a source of finance.

Features of Trade Credit:

The features of trade credit are given below:

1. There are no formal legal instruments/acknowledgements of debt.

2. It is an internal arrangement between the buyer and seller.

3. It is a spontaneous source of financing.

4. It is an expensive source of finance, if payment is not made within the discount period.

Advantages of Trade Credit:

The advantages of trade credits are:

1. It is easy and automatic source of short-term finance.

2. It reduces the capital requirement.

3. It helps the business focus on core activities.

4. It does not require any negotiation or formal agreement.

Disadvantages of Trade Credit:

Like other sources of finance, trade credit is also associated with certain disadvantages, which are as follows:

i. Trade credit is available only to those companies that have a good track record of repayment in the past.

ii. For a new business, it is very difficult to finance working capital through trade credit.

iii. It is very expensive, if payment is not made on the due date.