Trade Credit & Commercial Bank Loan Products Flashcards
(85 cards)
Postponing payment beyond the end of the net (credit) period
Stretching Accounts Payable
Possible costs of “stretching accounts payable”
- cost of the cash discount (if any) forgone
- Late payment penalties or interest
- Deterioration in credit rating
Should a company use Trade credit?
– If your company has the free cash flow to take
the discount offered in the terms of credit, then
yes.
– However, you should calculate the cost of trade
credit, or the cost of not taking the discount. If
you do not have the cash flow to take the
discount, you are usually better off with a
cheaper form of financing. It is always better to
have enough cash flow on hand to take the
discount.
Lost discount only provides 20
extra days of credit, assuming payment on
day 30.
T OR F
T
4 major reason why businesses borrow
- for WC
- for PA
- for REHIF
- for AE
An agreement where a customer can purchase
goods on account (without paying cash), paying
the supplier at a later date.
Trade Credit
• Usually when the goods are delivered, a trade
credit is given for a specific amount of days -
30,
60 or 90.
represent the credit sales for which a firm has yet to receive payment.
– Accounts receivable
represents the amount that a firm owes its suppliers for goods that it has received but for which it
has not yet paid.
– Accounts payable
formula for calculating the effective annual cost to your firm if it chooses not to take advantages of trade discount
EAR = (1+r)^n -1
where r = 1/99
where n = 360/ (credit period - discount period)
benefits of trade credit
• First, trade credit is simple and convenient to
use, and it has lower transaction costs than
alternative sources of funds.
• Second, it is a flexible source of funds, and can
be used as needed.
• Finally, it is sometimes the only source of funding available to a firm.
Types of Trade credit
- Cash terms
- Net period credit
- net period credit w/ discount
– Under this credit arrangement, there is no risk to the supplier. The use of this happens when
there is a ͞seller market͟ for the product.
– Cash terms
– Under this credit arrangement, the supplier fixes the payment period but does not give a discount.
This credit term is more common in goods that carry small profit margins.
-Net period credit
These are also used as a temporary arrangement
when the supplier does not know the creditworthiness of a new customer.
cash terms
The supplier fixes a payment period and allows a cash discount for prompt payment
-Net period credit discount
is the total length of time credit is
extended to the buyer—the total amount of time they
have to pay (30 days).
credit period
is the number of days the buyer has to take advantage of the discount (10 days).
2/10, n 30
discount period
is the percentage discount offered if the buyer pays early (2%).
cash discount
– If payments consistently exceed 30 days, firm runs the risk of
becoming ͞Cash on Delivery͟, or COD
Loss of discount and no credit period
• Payable on a fixed date or within a specified period of time for which interest is not collected in advance or discounted from the face value of the promissory note.
short term loans
Allows a customer to get advances using post-dated checks
issued by their customers.
Post-dated Check Discounting Line
the bank provides a
short-term loan to the banking customer by granting access to
funds that haven’t yet been received from the account against
which the check is drawn.
Post dated check discounting line
post dated check discounting line must take in consideration
- Creditworthiness of the check issuer must be considered.
* Checks should be supported by delivery receipts.
