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

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

Trade credit is spontaneous, so it expands automatically as the firm's purchases increase, without formal sanction or collateral. The other options describe features that do not belong to ordinary trade credit, which is typically unsecured and has no RBI-fixed interest rate.

  1. AIt carries a mandatory interest rate fixed by RBI
  2. BIt is spontaneous and grows automatically with the firm's purchasesCorrect
  3. CIt requires the firm to pledge fixed assets as security
  4. DIt is available only after a bank sanctions a credit limit

Explanation

Trade credit is a spontaneous source: as purchases rise, payables rise without formal negotiation or a sanction process. The other options describe features that do not apply to ordinary trade credit, which is generally unsecured and not tied to an RBI-fixed rate.

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