Trade Credit – An arrangement to buy goods or services on the account without making immediate cash payment.
For many businesses, trade credit is an essential tool for financing growth. Trade credit is the credit extended to you by suppliers who let you buy now and pay later. Any time you take delivery of materials, equipment or other valuables without paying cash on the spot, you’re using trade credit,
Features of Trade Credit
The features of trade credit are given below:
- There are no formal legal instruments/acknowledgments of debt.
- It is an internal arrangement between the buyer and seller.
- It is a spontaneous source of financing.
- It is an expensive source of finance if payment is not made within the discount period.
Advantages of Trade Credit:
- It is an easy and automatic source of short-term finance.
- It reduces the capital requirement.
- It helps the business focus on core activities.
- It does not require any negotiation or formal agreement.
Disadvantages of Trade Credit:
- Trade credit is available only to those companies that have a good track record of repayment in the past.
- For a new business, it is very difficult to finance working capital through trade credit.
- It is very expensive if payment is not made on the due date.