Which type of source of finance facilitates the purchase of supplies without immediate payments? State its merits and demerits also.
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. It is commonly used by business organisation as a source of short-term financing it is granted to those customels who have reasonable amount of financial standing and goodwill.
Merits
(i) Trade credit is a convenient and continuous source of funds.
(ii) It may be readily available in case the credit worthiness of the customers is known to the seller.
(iii) It needs to promote the sale of an organisation.
(iv) It does not create any charge on the assets of the firm while providing funds.
Demerits
(i) This may indulge a firm in over trading.
(ii) Only limited amount of funds can be raised through this source.
(iii) It is generally a costly source of fund as compared to others.