Trade credit is a type of commercial financing in which a customer is allowed to purchase goods or services and pay the supplier at a later scheduled date.
Trade credit can be a good way for businesses to free up cash flow and finance short-term growth.
Trade credit can create complexity for financial accounting depending on the accounting method used.
Trade credit financing is usually encouraged globally by regulators and can create opportunities for new financial technology solutions.
Suppliers are usually at a disadvantage with a trade credit as they have sold goods but not received payment.
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Pros of Trade Credit
Cost-effective means of financing for buyers
Improves cash flow for buyers
Encourages higher sales volumes for sellers
Leads to strong relationships and customer loyalty for sellers
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Cons of Trade Credit
High cost for buyers if payments are not made on time
Late payments or bad debts can negatively impact a buyer's credit profile and relationship with suppliers
Sellers run the risk of buyers not paying their debts
Delayed payments can be a strain on the balance sheet for sellers
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Who Would Provide This Type of Finance
The businesses that would provide the type of finances are the suppliers for the business
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What Type of Business is it Suitable For
Any business may use this for type of finance. One example could be a garden landscaping company
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What Factors Would Affect the Choice of This Sourc
The factors that may affect this if relations between supplier and business are fragile and tense.
Also if the business in the past has missed payments, the suppliers are less likely to allow it to happen again
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