Write a short note on trade credit and also mention its merits and limitations.
Trade credit refers to the credit provided by one firm to another for the purchase of goods and services. It is a source of short-term finance and facilities purchase of goods and services without immediate payment.
Advantages (Merits) :
1. It promotes the sales of an organisation.
2. It is a continuous and convenient source of funds.
3. It does not create any charge on the asset of the business.
4. This source is very easily available when the creditworthiness of the customers is known to the sellers.
1. Through this source, only a limited amount of funds can be raised.
2. This source is generally costly as compared to other sources.
3. A loss of cash discount is also noticed.
4. A firm may indulge in overtrading due to easy availability and flexibility if this source. This adds risks to the firms.