Trade credit

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:

1. Trade credit is convenient and continuous source of funds.

2. Trade credit may be readily available in case the credit worthiness of the customers is known to the seller.

3. Trade credit needs to promote the sales of an organisation.

4. It 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. It 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. Only limited amount of funds can be generated through trade credit.

3. It is generally a costly source of funds as compared to most other sources of raising money.