Question

talk about trade credit. How does it work? Please provide an example.

Answer 1

Answer:

Trade Credit
Trade credit is the credit that is being given to small businesses ot startups by the suppliers. In trade credit, the small businesses are allowed to purchase goods now and pay for them later. It serves as a short term loan to small businesses and startups to help them in continuing their business, building customers and create relationships with suppliers which in turn help them in the growth of their businesses. For small businesses and startups, it becomes a challenge for them to obtain material and start their business due to lack of funds. At this time, trade credit comes to their rescue by suppliers offering them equipment and material to start their business and when they start earnings, they return back their money.

How trade credit works
Trade credit is usually obtained by small businesses and startups that struggle with the cash flow and want to obtain stock and equipments for setting up their business. The terms are negotiated and predecided with the suppliers. The term for trade credit is mosttly specified from few days to months as decided by botht the parties. Unlike bank loan, there are less formalities and usually no interest in trade credit. Penalties can be there if there is late payment by the purchasers.
For example, a catering business receives a big order for an event. Due to small business, they have cash flow issues, so instead of purchasing groceries items in cash, they can obtain them on credit from such suppliers for a specific term (say till the event is completed), so once the event gets completed, they will receive the money from the customers and can pay their trade credit amount to the supplier from whom it is being obtained.