Trade Credit

(Short term financing)

AAKRATI KUMAWAT
ROLL:- 16
Trade credit
 It refers to the credit that the customer gets
from the suppliers of goods.

 In practice, the buying firms do not have to

pay the cash immediately for the purchases
made.

 In India it contributes about 1/3rd of the short

term financing.
Trade Credit (cont.)

 Small firms are heavily dependent on it.

 It is mostly an informal arrangement, and is

granted on an open account basis.

 It may also take the form of bills payable.

Credit Terms
 Credit terms refer to the conditions under
which the supplier sells on credit to the
buyer, and the buyer is required to repay the
credit.
It includes:- a) Due date
b) Cash discount
Credit Terms (cont.)
 Due date:- the date by which the suppliers
expects payment.

 Cash discount:- the concession offered to the

buyer by the supplier to encourage him to
make payment promptly.
Credit terms (cont.)
 The typical way of expressing credit term is
for example:

‘3/15, net 45’.

implies that 3 months credit is available if

the credit is repaid on 15th day, and in case
the discount is not taken, the payment is due
by the 45th day.
Benefits and Cost of Trade Credit
 It is a spontaneous source of financing.

 As the volume of the firm’s purchases

increases, trade credit also expands.
The major advantages of Cash Credit
are as follows:-

 Easy availability:- easily available to the

small firms which generally face difficulty in
raising funds from the capital market.

 Flexibility:- trade credit grows with the

growth in firm’s sales. The expansion in the
firms sales causes its purchases of goods
and services to increase which is
automatically financed by the trade credit.
(Cont…)
 Informality:- it is informal, spontaneous
source of finance. It does not require any
negotiations and formal agreement.
Disadvantages
 It sometimes not a cost free source of finance.

 It leads to loss of opportunity cost on part of both

buyers and sellers.

 If repayments are not made in time, the business

will receive a poor credit history.

 Only companies with a good credit history will get

trade credit and these can often be hard to build
up, especially for new businesses.
Thank you