What is meant by trade credit ? Mention two advantages of trade credit

1.	What is meant by trade credit ? Mention two advantages of trade credit as a short-term source of finance.
Answer» Trade credit is an important external source of working capital financing. It is a short-term credit extended by suppliers of goods and sendees in the normal course of business, to a buyer in order to enhance sales. Trade credit arises when a supplier of goods or sendees allow s customers to pay for goods and sendees at a later date. Cash is not immediately paid and deferral of payment represents a source of finance. Advantages: • There are no formal legal instruments/acknowledgements of debt. • It is an internal arrangement between the buyer and seller. • It is a spontaneous source of financing.

What is meant by trade credit ? Mention two advantages of trade credit as a short-term source of finance.

Answer»

Trade credit is an important external source of working capital financing. It is a short-term credit extended by suppliers of goods and sendees in the normal course of business, to a buyer in order to enhance sales. Trade credit arises when a supplier of goods or sendees allow s customers to pay for goods and sendees at a later date. Cash is not immediately paid and deferral of payment represents a source of finance.

Advantages:

• There are no formal legal instruments/acknowledgements of debt.

• It is an internal arrangement between the buyer and seller.

• It is a spontaneous source of financing.

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