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Trade Credit Assignment Help
For the finical growth, trade credit is a very essential and important approach. With the help of trade credit, a company buys the product from the suppliers and pays later, without paying on the spot. It is an open account so that the company can buy from the suppliers or the vendors as long as the company needs depending on the terms and conditions, and is usually for a shot period depending upon the potential requirements such as for one month to two or three months. While in many cases, it may extend more than this such as jewellery business. It is that payment which is put off to a later time by a seller to a buyer as a standard trade practice. In simple words, trade credit is “Buy Now, Pay Later”, which is a deferment of payment for goods or services purchased. Trade credit is trade agreement between the customer and the supplier, on basis of which he can purchase goods, paying the supplier later date. It is based upon the agreement of both the parties.
Trade credit insurance indemnifies seller against any loss due to non – payment of trade debt, may be due to insolvency or delayed default. QBEis an Australian trade credit insurance provider.
The trade credit pattern of any company depends on many factors including the overall nature of the goods such as Perishability, relative size of buying and selling firms, competition degree, the averageturnover stock rate etc. It is the largest use of capital for B2B sellers. It facilitated the supply purchase without making any immediate payment. The retail giant Wal-Mart has used the trade credit more than bank borrowings to fund its business. I give a very basic example of trade credit. Suppose Kevin has to start his business of Sports Merchandise. He needs both money and the products to establish the business. Bank can provide him money to fund his business, while trade credit helps him in getting goods such as sports apparel, sports accessories etc. from other established companies of sports merchandise. Kevin would require filling out a credit application and using the vendor’s own credit card. The vendor would allow him a time period of 30 days for $500. Kevin would avail the discount of 2% or a $10 if he pays the amount within 10 days (known as 2/10, net 30). In many cases, the cost of funds is borne by the buyer and the seller as well depending upon their mutual understanding. The long term credit can extend from goods with slow turnover rates.
This trade credit is also given to buy the startup inventory. It can be either a long term or a short term credit which depends on the terms and conditions set by both the parties after the mutual agreement. Though it has benefits for both the buyers and the sellers, yet there are disadvantages also. A trade credit should induce high sales over the time, allowing customers to purchase without making on the spot cash payment. This purchase method helps customer in making larger purchase if the prices are reasonable and right. It increases revenue as it often produces interest fees and late payment fees for the creditors with the higher sales volume.
For the resellers perspective, if the cash balances are low even then the indeed inventory can be possibly bought on credit. The available cash can be used for paying off long term debts. It shows negative cash effects on the suppliers/vendors if the buyers are not able to pay off the debt in time. This is known as bad debt. This lowers the profit of companies. If the debt is not paid for long, the suppliers have to wait to collect the cash which is required to pay their own bills. This may even lead to higher payment for the inventory costs if the buyers make use of trade credit in careful manner. In the example of Kevin, if he fails to pay the debt on time, he will have to pay the late payment fees and interests. The main advantage is that the company doesn't have to pay the cash up front. Due to this, the company is able to retain its cash from other capital requirements in short terms. As the primary concern is to improve the short term cash position.
With the help of trade credit, the company saves cash for other immediate needs such as other debt payments. Almost every new company depends upon the trade credit in its initial phases until the company begins to make its own revenue and cash flow to pay off its creditors. And if the company pays the debt before time, the suppliers offer the discount depending upon the agreements. It reduces the capital requirements by improving the cash flow.
Trade Credit Assignment Help | Economics Assignment Help
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