DISCUSS the Costs of Availing Trade Credit

Normally it is considered that the trade credit does not carry any cost. However, it carries the following costs: (i) Price: There is often a discount on the price that the firm undergoes when it uses trade credit, since it can take advantage of the discount only if it pays immediately. This discount can translate into a high implicit cost. (ii) Loss of goodwill: If the credit is overstepped, suppliers may discriminate against delinquent customers if supplies become short. As with the effect of any loss of goodwill, it depends very much on the relative market strengths of the parties involved. (iii) Cost of managing: Management of creditors involves administrative and accounting costs that would otherwise be incurred. (iv) Conditions: Sometimes most of the suppliers insist that for availing the credit facility the order should be of some minimum size or even on regular basis.