Question

What is meant by trade credit?

Answer 1

1. Trade credit is the credit extended by one business firm to another for purchase of goods and services. It is also known as mercantile credit.
2. Trade credit may be defined as credit extended by sellers to buyers at all levels of the production and distribution process down to the retailer.
3. It does not include consumer credit or instalment credit. It arises out of transfer of goods and is unsecured.
4. Trade credit is usually granted for periods ranging from 15 days to three months.
5. The buying firm receives supplies without paying immediately.
6. Trade credit reflects the buyer's power to purchase now and pay later. It also indicates the seller's faith in the buyer.
7. Trade credit is available in the ordinary course of business and no security is required for getting it.
8. The amount and terms of credit available depend upon the financial strength and goodwill of the buyers, the custom of trade, financial resources of the supplier, the amount and frequency of purchases, degree of competition in the market, location of the customers, the nature of products, etc. Trade credit does not make available the funds in cash.