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

Which of the following is a recognised advantage to a buyer of using trade credit as a source of short-term finance?

Trade credit is a spontaneous source of finance. It arises automatically from buying on credit and grows as purchases increase, without formal negotiation, collateral on fixed assets or an RBI-fixed interest rate, which makes it convenient for buyers.

  1. AIt is a spontaneous source of finance that grows with purchasesCorrect
  2. BIt always carries an explicit interest charge fixed by RBI
  3. CIt requires the buyer to create a charge on fixed assets
  4. DIt must be repaid only after the buyer's annual accounts are approved

Explanation

Trade credit arises automatically in the course of business and increases as purchases rise, so it is called spontaneous finance. It generally has no explicit interest and needs no security on fixed assets. Repayment is tied to invoice terms, not to approval of accounts.

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