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CA Intermediate · Financial Management and Strategic Management · Management of Payables (Creditors)

Which of the following is a feature of trade credit as a source of short-term finance for a firm?

Trade credit is a spontaneous source of finance. It arises automatically from credit purchases, so it expands as purchases increase. It does not need a charge on fixed assets, carries no explicit fixed interest rate and is not limited to firms with a long profit record.

  1. AIt is a spontaneous source of finance that grows with the volume of purchasesCorrect
  2. BIt always carries a fixed rate of interest stated in the agreement
  3. CIt requires the firm to create a charge on its fixed assets
  4. DIt is available only to firms with a long record of profits

Explanation

Trade credit arises automatically from purchases on credit, so when purchases rise, payables rise too. This is why it is called spontaneous finance. It generally needs no security or formal charge on assets, and it has no stated interest rate, so the other options are wrong.

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