It is a spontaneous source of finance that is commonly extended to business organization depending on the custom of the competition and trade prevailing within the organization and relations of the buyers and suppliers. This type of business credit is more admired as it contributes to regarding one-third of the total short-term credit. The addiction on such source of working capital finance is higher because of negligible cost of finance as comparison to negotiated finances.
This is a facility whereas business firms are permitted by the suppliers of raw materials, parts, elements and services, etc, to defer instantaneous payment to an exact future period. Trade credit is produced when a company needs supplies, materials or merchandise and doesn't pay for them instantly. If a buyer is capable to determine the credit without any legal instrument or evidence, this is called 'Open Account Trade Credit' and emerges in the Balance Sheet of the buyer as sundry creditors. While an instrument is specified, notably negotiable instrument, within acknowledgement of the debt, similar appears in the last statement as Bills or Notes payable.