MEANING
Trade credit is the credit extended by one
business firm to another as incidental to sale
or purchase of goods and services.
 It is also known as mercantile credit.

 DEFINITION- it may be defined as credit
extended by sellers to buyers at all levels of
the production and distribution process down
to the seller.
INTRODUCTION
It does not include consumer credit or
installment credit,
 Arises out of transfer of goods,
 Is unsecured,
 Granted for periods ranging from 15
days to 3 months,
 Buying firm receives supplies without
paying immediately.

INTRODUCTION
Reflects the buyer’s power to purchase
now and pay later,
 Indicates the seller’s faith in the buyer,
 Is available in the ordinary course of
business,
 No securities required for getting trade
credit.

TRADITIONAL TRADE CREDIT
METHOD:
EXAMPLE

A and co. purchases goods on credit
from B and co. for Rs. 50000 on 3
months credit. This means A and co.
requirement for working capital for 3
months is reduced to the extent of Rs.
50000. additional credit can be
generated by increasing purchase
volume and extending the credit period.
CONDITIONS
The amount and terms of credit available
depends on :








Due date(net date),
Cash discount,
Financial strength,
Goodwill of the buyer,
Custom of trade,
Financial resources of the supplier,
Amt and frequency of purchases,
Nature of products.
TRADE CREDIT INSURANCE

Trade credit insurance protects against non-payments of
receivables by the customers due to insolvency, creditors
protection arrangement, or protracted defaults. In case of
export sales, the insurance can protect against non-payment
due to certain political events beyond the customers control.

Trade credit is not for corporations that have poor credit
management or are seeking high levels of bad debt to an
insurer. It compliments credit management and can add
significant resources and intelligence to prevent losses and
aid decision-making through access to insurer’s buyers
database.
WHY GO FOR TRADE CREDIT THAN BORROW FROM
FINANCIAL INSTITUTIONS?

Borrowing from commercial banks represents the traditional
channel of acquiring funds.

The financial institutions may not be accurately able to
evaluate the risk associated with lending to businesses,
especially small and mid – sized. On the other hand, suppliers
may be better placed to understand the dynamics of business,
evaluate and control the credit risk of their buyers.

Trade credit creates a win – win proposition for both –
buyers and suppliers. While buyers have the advantages,
suppliers also have assured buyers for their products.
TYPES


Net 30 accounts
Net 10 accounts

These net terms specify payment is expected to be made in
full 30(net 30) or 10(net 10) days after the goods are
delivered to the retailer.

Some vendors offer cash discounts and the retailer may
notice the notation "1/10, Net 30" on their invoice. This refers
to a 1% discount to the retailer if payment is received within
10 days of the delivery of goods, and full payment is
expected within 30 days.

If an invoice is $5000 and "1/10 Net 30" is noted, the retailer
can take a 1% discount ($5000 x .01 = $50) and make a
payment of $4950 within 10 days.
ADVANTAGES
Simple,
 Convenient method of raising short term
finance,
 No formalities involved,
 Credit readily available to reputed firms,
 Flexible source,
 Economical than bank loans.
 Second most liquid asset after cash.

DISADVANTAGES
Prices charged for credit sales are usually
higher,
 Supplier has to bear a loss of bad debts,
 Supplier has to bear cost of administering
credit accounts,
 Requires a large working capital to supply
goods on credit.
 Buyer looses cash discounts.

LETTER OF CREDIT

Letter of Credit often termed as Documentary Credit (DC)
is an instrument issued by a financial institution mostly a
Bank on behalf of its client (Buyer/Importer) to provide an
irrevocable guarantee to the beneficiary of LC
(Seller/Exporter) against the complying documents as
stated. It is the most secured form of instrument for trade
transaction of both domestic and foreign in nature.

LC is a trade credit mechanism through which the
importer/buyers provide secure terms of payment to
seller/exporter. In lay man term it an indemnity issued by
the bank on behalf of its customer to act upon in the event
of his default.
EXAMPLE:
BASIC DOCUMENTS IN LC

Commercial Invoice : This is the most essential
document requested in the LC. This instrument made by
the seller/exporter of the goods and contains details of
goods (Quantity, amount and total price), details of buyer
and taxes as applicable.


Transportation document : This is an instrument
that transfers the ownership of goods and is a mandatory
document. This is a document issued by the agency
responsible for carrying the goods from buyer to seller. In
case the goods are send through sea the transportation
document would be Bill of Lading , in case of air it would
be Air Way Bill and in case of by road it would be Lorry
receipt.

Insurance Document: Insurance document is
the insurance policy of the goods, securing both the
buyer as well as seller from the losses to the goods
on account of transit or natural hazard.

Certificate of Origin : This is a certificate which
informs as to from where the goods are being
originally shipped and also mentions the destination
as well.

This instrument is
generally asked in case of foreign transaction,
whereby it is not feasible for the buyer to
inspect the goods at the site before they are
shipped. In this case the buyer allocate this
responsibility to a local inspection agency and
in turn asks for a certificate issued by them to
be part of document of LC, to ensure that the
goods being shipped are as per his needs and
specifications.
Inspection
Certificate:
TYPES OF LC

Irrevocable LC : An irrevocable LC is the one in which
the terms and condition cannot be changed without the
consent of both the parties i.e. buyer and seller. Almost all
trade transaction are done through this form of LC as it
secure both the buyer and supplier

Revocable LC: In contrary to irrevocable LC the
contents of this form of LC can be easily change on the
request of the applicant.

Sight LC : This LC means that the payment to the
beneficiary is to made immediately on the day of
presentation of correct documents in due course of time.

Usance LC :
This LC means that the payment of the
LC would be made on a day as stated in the LC . Such
an instrument is used when the seller wants to offer
some credit period to his client along with an interest to
assure his payments.
THANK
YOU
AKANSHA AGARWAL
ANKITA RANKA
08D1063
08D1064