Q. 14.0( 4 Votes )

Explain trade credit and bank credit as sources of short-term finance for business enterprises.

Answer :

Trade credit-

a. Trade credit is the credit extended by one trader to another for the purchase of goods and services.


b. 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’.


c. Trade credit is commonly used by business organisations as a source of short-term financing. It is granted to those customers who have a reasonable amount of financial standing and goodwill.


d. The volume and period of credit extended depend on factors such as the reputation of the purchasing firm, the financial position of the seller, volume of purchases, record of payment and degree of competition in the market.


e. Terms of trade credit may vary from one industry to another and from one person to another. A firm may also offer different credit terms to different customers.


f. Trade credit is a convenient and continuous source of funds and needs to promote the sales of an organisation.


Bank credit-


a. Bank credit is not a permanent source of funds. Though banks have started extending loans for longer periods, generally such loans are used for medium to short periods.


b. The borrower is required to provide some security or create a charge on the assets of the firm before a loan is sanctioned by a commercial bank.


c. Secrecy of business can be maintained as the information supplied to the bank by the borrowers is kept confidential


d. Formalities such as the issue of prospectus and underwriting are not required for raising loans from a bank, thus it became an easier source of funds.


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