Trade credit can be referred to as the credit that one firm grants to other firm so that the latter can buy services and goods. In other words, trade credit can be defined as the goods or services provided to the customers by a firm while accepting an agreement that the billing for the same will be done later.
The trade credit is also described as the amount that is granted to the exporter as loan only when the exported goods are paid by the importer firm. Typically, the trade credit means the practice of purchasing services or goods on account while no immediate payment of cash is made.
If the process of trade credit is handled properly, the capital investment that is required by a business for its operations can be reduced considerably. The trade credit process is considered to be very important factor of capitalization. The current market says that trade credit concept is hugely used in the business to business dealings.
Trade credit can also be referred to as the delayed outflow of cash of a business. Trade credit is actually an open account with the vendor that lets its customers to purchase goods now and make the payments later. .
While in the business, the manufacturers and retailer are always on the lookout for the best profitable supplier who not only provides goods in the lowest prices but also commits to offer dependable and fast delivery service. The trade credit option is one of the best tools used for the retailers and manufacturers as the short-term cash flow management. However, the trade credit should not be used for long-term purpose.
The trade credit practicing helps the businesses to create extra resource of cash by holding up the cash outflow by not making payment at the purchase time. Hence businesses need to take the full facility of trade credit while buying inventory and should manage the cash flow of the business.
Last Updated on : 27th June 2013