Trade credit, also known as vendor credit or supplier credit, refers to the extension of credit by a supplier or vendor to a customer. It is a common practice in business where the supplier allows the customer to purchase goods or services on credit, with an agreed-upon payment period.
Trade credit is often used as a short-term financing tool, allowing businesses to receive goods or services without immediate payment. It provides a cash flow advantage to the buyer as they can delay payment and use the purchased goods or services to generate revenue. The supplier, on the other hand, benefits from increased sales and customer loyalty.
Trade credit terms can vary depending on the agreement between the buyer and the supplier. It may include factors such as the payment period (e.g., 30 days, 60 days), discounts for early payment, and the credit limit the supplier is willing to extend to the buyer. The trade credit terms are typically specified in a purchase order or an agreement between both parties.
Managing trade credit effectively is crucial for businesses to maintain healthy cash flow and good relationships with suppliers.
What is trade credit in business studies
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