Advantages Of Using Trade Credit As A Source Of Finance

Megan

1 Nov, 2018

Trade credit is used when the buyer is not able to pay the real cost of goods. A business using trade credit runs the risk of paying delinquency fees on past due balances.

Sources Of Finance

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Amount and period of trade credit are dependent on two things.

Advantages of using trade credit as a source of finance. There are no more obligations to the lender once a loan has been paid off. Trade credit financing refers to the practice of vendors allowing your business to place and receive orders without making an immediate payment. The fees may be small but even a one percent fee paid monthly adds up over the course of time.

Option of fixed rate loans where the interest rate doesnt change for the life of the loan. Unlike trying to get a loan or credit extension from a bank trade credit doesnt involve lengthy. The vendor gives a fixed period of time to make payment typically 30 60 or 90 days.

It is relatively easy to secure short term finance if you have a strong trading record secured against goods or backed by an insurance policy. It is a short term credit extended by suppliers of goods and services in the normal course of business to a buyer in order to enhance sales. Advantages of trade credit.

1trade credit refers to credit granted to manufactures and traders by the suppliers of the raw materials finished goods components etc. Another disadvantage of trade credit is that most suppliers do not offer it to startup businesses at least until the business proves its dependability. It is a form of short term credit typically used by companies that export or import goods.

It is flexible the amount of credit reflects the value of business done with a supplier it is low cost trade creditors dont charge interest on the amount outstanding unless payment is delayed well beyond the. It has several important advantages to a business. One advantage is spontaneous finance.

It is a major source of working capital finance for most business whether small or big. Trade credit is considered as the cheapest form of working capital finance. Trade credit is an important external source of working capital financing.

Trade credit arises when a supplier of goods or services allows customers to pay for goods. Financing creates advantages but also generates some disadvantages. Usually business enterprises by supplies on a 30 to 90 days credit.

Banks dont take an ownership position in the business. Trade finance is an important external source of working capital finance. It is a costly source of finance.

Trade credit is a short term external source of finance. Trade credit is also known as a spontaneous source of finance. All other sources of working capital finance such as bank overdraft cash credit etc have interest cost attached to it practically there is no interest cost attached to trade credit provided the dues are paid within the credit period provided by the supplier.

Lets look at some advantages of using trade credit. Advantages of trade credit.

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