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| 1. |
Trade credit |
| Answer» Trade credit is the credit extended by one trader to another for the purchase of goods and services. Trade credit facilitates the purchase of supplies without immediate payment such credit appears in the records of the buyer of goods as ‘sundry creditors’ or ‘accounts payable’.Merits of trade credit are as follows:\xa01.\xa0Trade credit is convenient and continuous source of funds.2.\xa0Trade credit may be readily available in case the credit worthiness of the customers is known to the seller.3.\xa0Trade credit needs to promote the sales of an organisation.4.\xa0It an organisation wants to increase its inventory level in order to meet expected rise in the sales volume in the near future, it may use trade credit to, finance the same.5.\xa0It does not create any charge on the assets of the firm while providing funds.Demerits are as follows :1. Availability of easy and flexible trade credit facilities may induce a firm to indulge in overtrading, which may add to the risks of the firm.2.\xa0Only limited amount of funds can be generated through trade credit.3.\xa0It is generally a costly source of funds as compared to most other sources of raising money. | |