Short-term financial arrangement is one of the options a company uses to organize its assets for effective operations. It is defined as any debt scheduled for repayment within the period of one year. On the other hand, intermediate financial arrangement may be said to be any debt obligation scheduled to be repaid between 1 and 7 years.
In consequence, there are many sources/ ways a firm or company can raise short-term and intermediate funds. One of such sources is what is termed as "Trade Credit."
A firm which buys goods and services on credit creates accounts payable. Trade credit arrangements may be on open account, promisory notes and trade acceptances. In an open account, a firm requests a line of credit from the seller. The seller agrees on the level, period and terms of credit including how to place for orders, quantity, product types etc.
Also, the buyer does not have to sign a special credit agreement each time he buys except the sales invoice for each purchase. The open account is often used in fast moving items. The promissory note is another approach where the buyer signs a promissory note of indebtedness. The loan for repaying the debt can be obtained from a commercial bank by a credit worthy customer. In addition, the note states the terms of the loan, length, value, and interest charges which is often tied to the prime rate.
Furthermore, trade acceptances require that the seller prepares a trade bill on the buyer. The bill obligates thw buyer to pay a designated amount of money in future. The buyer on the other hand accepts and names a bank where the bill will be paid when due. The seller then releases the goods and would present the bill when due for collection. A lot of factors like the status of the buyer and seller tends to affect the trade credit arrangements.
Posted Using LeoFinance Beta