| Posted: 12 May 2011 at 17:09 | IP Logged
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If you can purchase goods without having to repay the supplier until some future date at an interest rate of 0%, then why is trade credit considered an expensive form of financing?
After looking at this Becker question, I can't completely understand the answer choice, unless it implies a net discount, which I understand can be expensive if you forego. But what if the supplier offers no discount and 0%. Is it still expensive credit?
Which one of the following statements about trade credit is correct? Trade credit is:
- Not an important source of financing for small firms
- A source of long-term financing to the seller
- Subject to risk of buyer default
- Usually an inexpensive source of external financing.
Choice "c" is correct. Trade credit is subject to risk of buyer default.
Choice "a" is incorrect. Trade credit is an important source of financing for small firms.
Choice "b" is incorrect. Trade credit is not a source of long-term financing to the seller.
Choice "d" is incorrect. Trade credit is usually an expensive source of external financing.
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Topic: Trade Credit
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