CA Intermediate · Financial Management and Strategic Management · Management of Payables (Creditors)
Which of the following is a recognised disadvantage of relying heavily on trade credit from suppliers?
The recognised drawback is that habitual late payment harms supplier goodwill and may lead to stricter terms or disruption of supplies. Trade credit is normally unsecured, carries no explicit interest and does finance inventory.
- ALoss of supplier goodwill and risk of supply disruption if payments are habitually delayedCorrect
- BIt always requires collateral security from the buyer
- CIt bears an explicit fixed rate of interest
- DIt cannot be used to finance inventory
Explanation
Stretching payables beyond agreed terms can damage relations, lead to stricter terms, higher prices or stoppage of supplies. Trade credit is generally unsecured, usually carries no explicit interest, and mainly finances inventory, so the other options are wrong.
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