TRADE CREDIT
Presented by; Muhammad Idrees
BBS 2nd (A)
TABLE OF CONTENTS
Trade Credit
Advantages & Disadvantages of Trade Credit
Types of trade credit
Trade Credit Terms
Types of trade credit terms
Factors that influence trade credit terms
TRADE CREDIT
An agreement through purchase of goods (inventories) on
a/c.
Paying on a later date.
Given for a specific time period.
It is given sometimes to encourage sales.
Essential tool for financial growth.
Buy now and pay later.
Easiest and most important source of short term financing.
ADVANTAGE AND DISADVANTAGES OF
TRADE CREDIT
Advantages:
An agreement easy to organize.
An agreement easy to maintain, as long as the
conditions are met.
Can be used by most business, for supplies of goods or
services.
A potentially low-cost form of working capital finance.
Disadvantages:
Possible loss of early payment discount.
If conditions are not met, results in loss of a supplier.
Cannot be used by all businesses, such as online
retailers.
There are no guarantees, as customers may pay late.
TYPES OF TRADE CREDIT
Mainly three types of trade credit:
i.
Open Account
ii. Promissory Note
iii. Trade Acceptance
i. Open Account:
Under this arrangement, the buyer request a line
of credit from the seller.
. Line of credit:
Right given to the Buyer for the purchase on credit up to
certain amount from the seller based on his reputation.
2. Promissory Note:
. Under this arrangement, the buyer signs a note with
the seller for purchasing goods on credit.
. The buyer promises to make payment on some future
date.
. The payment is made by the Buyer himself.
3. Trade Acceptance:
. It is same as Promissory note.
. But in this, the payment is made by the bank.
. Time factor is involved in it i.e. made payment at
specified time.
. And made this payment only to the holder of this note.
TRADE CREDIT TERMS
The terms and conditions under which the goods are sold on
credit from the seller to buyer.
OR
When a business enters into a trade credit arrangement with its
suppliers, a limit is usually set, commonly called credit terms.
Credit terms will differ from business to business and industry to
industry.
Businesses that receive payments on delivery, for example
online shopping sites, may have a shorter credit term than an
industrial manufacturer.
TYPES OF CREDIT TERM
Mainly Six types of Credit term:
i.
Credit period only
ii. End of month (EOM)
iii. Cash discount and End of month
iv. Receipt of Goods (ROG)
v. Dating
vi. Cash on Delivery and Cash before Delivery
1. Credit period only:
.
Take Net,30 as credit period only.
Which means that payment of goods traded on
credit must be done within the 30 days from the
Selling Date.
.
Take 2/10,Net 30
When we offer discount.
2. End of month:
. Consider Net 20, EOM as End of Month term.
Which means that the payment must be made on
the 20th date of the next month.
3. Cash discount and End of month:
. If the credit term is 2/10, Net 25, EOM.
It means that the payment of the goods must be
done on the 25th date of next month but if the
payment is made On or Before the 10th date of
the next month, then 2% discount will be given in
the payment.
4. Receipt of Good (ROG):
. Under the receipt of goods condition, the credit term starts
from the date upon which the delivery of the goods is
received.
. The receipt of goods condition can also be 2/10, Net20,
ROG.
Which means that payment must be made in 20days
from the date of delivery. 2% Discount should be also
given, if payment is made in 10 days from delivery date.
5. Dating:
. Such type of credit term arises, when off season
goods are traded.
Which means that, goods are bought by the buyer
in the off season and the payment is done when
the season arises and the goods are sold.
6. Cash on Delivery and Cash before Delivery:
. Under the cash on delivery agreement, the payment
is made when the delivery of goods is received.
. Under the cash before delivery agreement, the
payment is made on the spot before receiving the
goods.
FACTORS THAT INFLUENCE CREDIT TERMS
Here are some of the factors that influence
the credit terms:
i.
Merchandise characteristics
ii. Status of buyer
iii. Status of seller
iv. Industry practice
1. Merchandise characteristics:
The credit terms are influenced by the
seasonality, perishables, obsolescence, cost and
demand patterns of the merchandise sold.
2. Status of buyer:
If a buyer has an established setup and he is
financially strong then in such a case, the buyer can
negotiate credit terms in his favor and the seller is
forced to agree on the terms of the buyer.
3. Status of seller:
If the seller is in the position of monopoly then he
can decide the credit term in his favor but if he is
financially weak then he would prefer to make sale
for cash or would like to receive payment as quickly
as possible.
4. Industry practice:
The credit terms are also influenced upon the
general condition of the credit terms which are
prevailing in the industry, are accepted by all the
firms of the same industry.
THATS ALL FOR OUR
PRESENTATION
Thanks.
Presented to: Madam Maria Ishtiaq
