Question

JSW Co. purchased goods on credit from SDW Co. and paid the amount after two months. Name the short term source of finance used by the buyer and state any three features of this source.

Answer 1

The short-term source of finance used by JSW Co. in this scenario is "trade credit".

Following are the features of trade credit:

1. Convenience: Trade credit is a convenient and accessible type of financing. Buyers can acquire goods or services on credit terms, eliminating the need for instant cash or external finance. This aids in managing short-term cash flow requirements and ensuring smooth operations.
2. Interest-Free (or Low-Interest) Financing: Trade credit typically has lower interest rates than other forms of short-term finance. This benefits buyers by lowering financing costs and improving cash flow management.
3. Flexibility in Payment Terms: Trade credit offers flexible payment terms, enabling purchasers to negotiate attractive payment plans based on their cash flow condition. Payment times might range from 30 days to 60 days or more, depending on the agreement between customer and supplier. This flexibility allows buyers to gain revenue from their purchases before making a payment.