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Trade Credit

Trade credit is short-term financing extended by one business to another for the purchase of goods and services. It allows buyers to delay payment for supplies. The amount and duration of trade credit depends on factors like the reputation and financial strength of the buyer, purchase volume, past payment history, and market competition. While trade credit is convenient and promotes sales, it has limitations like potentially inducing overtrading, only providing limited funds, and being a relatively expensive source of financing.

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PUTTU GURU PRASAD SENGUNTHA MUDALIAR
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263 views5 pages

Trade Credit

Trade credit is short-term financing extended by one business to another for the purchase of goods and services. It allows buyers to delay payment for supplies. The amount and duration of trade credit depends on factors like the reputation and financial strength of the buyer, purchase volume, past payment history, and market competition. While trade credit is convenient and promotes sales, it has limitations like potentially inducing overtrading, only providing limited funds, and being a relatively expensive source of financing.

Uploaded by

PUTTU GURU PRASAD SENGUNTHA MUDALIAR
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
  • Trade Credit Introduction
  • Merits of Trade Credit
  • Limitations of Trade Credit

4.

Trade
Credit
2. Trade Credit
Trade credit is the credit extended by one trader to another for the purchase of
goods and services. Trade credit facilitates the purchase of supplies without
immediate payment.
Such credit appears in the records of the buyer of goods as ‘sundry creditors’ or
‘accounts payable’. Trade credit is commonly used by business organizations as a
source of short-term financing.
It is granted to those customers who have reasonable amount of financial standing
and goodwill.
The volume and period of credit extended depends on factors such as
reputation of the purchasing firm, financial position of the seller,
volume of purchases, past record of payment and degree of
competition in the market.
Terms of trade credit may vary from one industry to another and from one person
to another. A firm may also offer different credit terms to different customers.
Merits
The important merits of trade credit are as follows:
(i)Trade credit is a convenient and continuous source of funds;
(ii)Trade credit may be readily available in case the credit
worthiness of the customers is known to the seller;
(iii)Trade credit needs to promote the sales of an organisation;
(iv) If an organisation wants to increase its inventory level in
order to meet expected rise in the sales volume in the near
future, it may use trade credit to, finance the same;
(v)It does not create any charge on the assets of the firm while
providing funds.
Limitations
Trade credit as a source of funds has certain limitations,
which are given as follows:
(i) Availability of easy and flexible trade credit facilities
may induce a firm to indulge in overtrading, which may
add to the risks of the firm;
(ii) Only a limited amount of funds can be generated
through trade credit;
(iii) It is generally a costly source of funds as compared to
most other sources of raising money.

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