Trade Credit
Schill, Michael J.
Trade Credit
F-1941 | Published March 26, 2020 | 8 pages Technical Note
Collection: Darden School of Business
Product Details
When businesses deliver a product or service, they often forgo receiving immediate cash payment and allow their customers to pay later. Such payment terms are called trade credit. While trade credit fosters sales to existing and new customers, such credit is not free. The cost of trade credit to sellers is twofold: it creates repayment uncertainty and it increases the seller’s financing cost. By extending trade credit, sellers effectively take on a banking role as they finance a portion of their customers’ assets. This note explores and illustrates the tradeoffs that businesses make regarding trade credit.
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