Trade Credit

Meaning: Trade credit is credit extended by one trader to another for the purchase of goods and services — it lets a firm buy supplies without paying immediately. In the buyer's books this appears as "sundry creditors" or "accounts payable". It is a very common source of short-term finance.

Who gets it and how much: Trade credit is granted to customers who have a reasonable financial standing and goodwill. The volume and period of credit depend on:

• The reputation of the purchasing firm;
• The financial position of the seller;
• The volume of purchases;
• The buyer's past record of payment;
• The degree of competition in the market.

Terms of trade credit vary from one industry to another and from one person to another, and a single firm may offer different terms to different customers.

Merits

• Convenient and continuous source of funds.
• Readily available when the seller already knows the customer's creditworthiness.
• Helps promote the sales of an organisation.
• Useful for financing a planned rise in inventory ahead of an expected increase in sales.
• Creates no charge on the assets of the firm.

Limitations …