Meaning: -Every business involves credit transactions. Credit transactions comprise major part of business transactions. Trade credits (creditors) provide finance to the organization. It is a source of short of short term funds. As a business practice which has been set over time, suppliers give credit period for the payment to purchasers. In simple words, the suppliers deliver the goods to the purchasers but receive payment after the credit period from the date of purchase. This practice is used by suppliers to generate additional business and maintain good relationship with the purchasers.
Smaller companies with limited cash in hand often rely on trade credit to make inventory purchases on a regular basis. Trade credit has benefit to both the buyer and seller.
Some of these advantages are as follows:
1. The supplier (creditor) is able to generate higher volume of sales. The flexibility in purchasing encourages customers to make larger purchases when prices are right which they wouldn't have made if they had to pay cash up front.
2. Trade credit allows the purchasers to place purchase order without need to pay up front. This allows purchasers to use funds to pay long term debts and other critical payments.
3. Trade credit has no cost involved no interest is payable for using the credit.
4. Due to business relationship involved, the terms and conditions attached to trade credit are simple and not rigid.
There is no need of agreement for trade credit.
