Trade Credit: Trade credit is the credit extended by one trader to another for the purchase of goods and services. Trade credit facilitates the purchase of supplies without immediate payment. Such credit appears in the records of the buyer of goods as ‘Sundry Creditors’ or ‘Accounts Payable’. Trade credit is commonly used by business organisations as a source of short-term finance. It is granted to those customers who have reasonable amount of credit extended, and depends on factors such as reputation of the purchasing firms, financial position of the seller, volume of purchases, past record of payments and degree of competition in the market. Terms of trad a credit may vary from one industry to another and from one person to another. A firm may also offer different credit terms to different customers.
Bank Credit: Bank credit is not a permanent source of funds. Although banks have started extending loans for longer periods, generally such loans are used for medium to short periods. The borrower is required to provide some security or create a charge on the assets of the firm before a loan is sanctioned by a Commercial Bank.