Trade Credit:
Trade credit means credit extended to business by other traders to purchase inventories or services without making immediate payment.
Generally, a trader buys the goods on credit for a period of one and a half month and makes the payment of this fund later to the business. Trade credit depends on the firm’s creditworthiness, purchase volume, market competition and financial status of the buyer and seller.
Merits:
1. It is a very reliable and easy process.
2. Due to traders credit, credit-earning is easy.
3. The growth in selling increases.
4. It does not affect the property of the business.
Demerits:
1. Many times a lot of businesses may run into risk.
2. It is an expensive finance source.
3. It is a non – economic source.
Bank Credit:
The short term credit provided by commercial banks to business firms is known as Bank Credit. It can be divided into 2 parts.
1. Direct Credit –
Loan is provided directly to the bank employees. The amount of loan depends upon its current status.
2. Cash Credit –
It is an arrangement in which a specified amount sanctioned as a loan by the bank is credited to the customer’s account by the bank.
Merits:
1. It provides loan to the needy.
2. It provides secrecy.
3. It is very easy to receive a loan.
4. The interest can be increased or decreased as per the requirement.
Limitations:
1. Renewal is difficult because it provides small-term loans.
2. Due to the receiving of loan from another loan, its investigation is difficult.
3. The bank employs lots of conditions while applying for a loan, that affects its availability.
