Define trade credit and it's feature

Trade credit is an important external source of working capital financing. 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. Trade credit arises when a supplier of goods or services allows customers to pay for goods and services at a later date. Cash is not immediately paid and deferral of payment represents a source of finance.

The features of trade credit are given below:

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

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

3. It is a spontaneous source of financing.

4. It is an expensive source of finance, if payment is not made within the discount period.

Advantages

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

3. It is a spontaneous source of financing.

4. It is an expensive source of finance, if payment is not made within the discount period.