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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?

Trade credit is a spontaneous source of short-term finance because it arises automatically from purchases on credit and increases as purchase volumes increase. It usually has no explicit interest within the credit period and does not normally require security over fixed assets.

  1. AIt is a spontaneous source that grows with the volume of purchasesCorrect
  2. BIt always carries an explicit interest charge from the first day
  3. CIt requires the firm to pledge fixed assets as security
  4. DIt is raised by issuing commercial paper in the money market

Explanation

Trade credit arises automatically in the course of buying goods and rises as purchases rise, so it is called spontaneous finance. It generally carries no explicit interest within the credit period and is usually unsecured. Commercial paper is a separate instrument.

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