Q. Advantages of Trade Credit?
i) Easy Availability: Unlike other sources of finance, trade credit is relatively easy to obtain.
Except in the case of financially very unsound firms, it is almost automatic and does not require any negotiations. The easy availability is particularly important to small firm, which generally face difficulty in raiding funds from the capital markets.
ii) Flexibility: Flexibility is another advantage of trade credit. Trade credit grows with the growth in firm's sales. The expansion in the firm's sales causes its purchases of goods and services to increase which is automatically financed by trade credit. In contrast, if the firm's sales, contract, purchases will decline and consequently trade credit will also decline.
iii) Informality: Trade credit is an informal, spontaneous source of finance. It does not require any negotiations and formal agreement. It does not have the restrictions, which are usually parts of negotiated sources of finance. However, ,the biggest disadvantage of this method of finance is charging of higher prices by the suppliers and loss of cash discount.