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Trade credit, as a source of short term working capital finance, has certain advantages. It is easily, almost automatically, available. Moreover, it is a flexible and spontaneous source of finance. The availability and magnitude of trade credit is related to the size of operations of the firm in terms of sales purchases. For instance, the requirement of credit purchases to support the existing sales is Rs 5 lakh per day. If the purchases are made on a credit of 30 days. the average outstanding accounts payable trade credit (finance) will amount to Rs 1.5 crore (Rs 5 lakh x 30 days). The increase in purchases of goods to support higher sales level to Rs 6 lakh will imply a trade credit finance of Rs 1.8 crore (Rs 6 lakh x 30 days). If the credit purchases of goods decline, the availability of trade credit will correspondingly decline. Trade credit is also an informal, spontaneous source of finance. Not requiring negotiation and formal agreement, trade credit is free from the restrictions associated with formal negotiated source of finance credit.

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Posted by: andy

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