Question

What is meant by trade credit? Mention two advantages of trade credit as a short-term source of finance.

Answer 1

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

• There are no formal legal instruments/acknowledgments of debt.
• It is an internal arrangement between the buyer and seller.
• It is a spontaneous source of financing.