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SAI INTERNATIONAL SCHOOL

CLASSS XI

SUBJECT: BUSINESS STUDIES

CHAPTER -7, Sources of business finance

Topics: Trade Credits, Factoring, Lease Financing, Factors

Affecting Choice of Funds

(LESSON NOTES -37)

Trade Credit

 Trade credit is the credit extended by one trader to another for the
purchase of goods and services.
 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’.
 Trade credit is commonly used by business organizations as a source of
short-term financing. It is granted to those customers who have
reasonable amount of financial standing and goodwill.
 The volume and period of credit extended depends on factors such as
reputation of the purchasing firm, financial position of the seller, volume
of purchases, past record of payment and degree of competition in the
market.
 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.

Merits

(I) Trade credit is a convenient and continuous source of funds;
(II) Trade credit may be readily available in case the credit worthiness of
the customers is known to the seller;
(III) Trade credit needs to promote the sales of an organization;
(IV) If an organization wants to increase its inventory level in order to
meet expected rise in the sales volume in the near future, it may use
trade credit to, finance the same;
(V) It does not create any charge on the assets of the firm while
providing funds.