Trade credit
(
accounts receivable and accounts payable ) is both an important source and use
of funds
for manufacturing
companies in India. This paper empirically examines the determinants of trade
credit
the Indian context.
The empirical evidence presented suggests that strong evidence exists to
support
a pattern of
inventory management of the existence of trade credit. Highly profitable firms
are in
both give and
receive less trade credit. Companies with greater access to bank loans offer
less trade credit
their customers.
On
the other hand, firms with higher bank loans receive more trade credit .
Holdings
liquid assets have
a positive influence on both accounts receivable and accounts payable.
Trade credit is a
form of short-term financing , in which a supplier execute a command without
requiring money up front or on delivery . Instead , the supplier relax the
conditions of trade credit indicating the period within which the payment is
due. Although several types of commercial credit conditions are commonly used ,
including Net10 , Net30 , or net60 net 90 vendors can tell almost all terms
according to a client's business model. Companies often seek different types of
trade credit from suppliers to maintain cash flow , while providers may extend
various types of commercial credit to help customers better sell their
products. In addition , many vendors will also extend trade credit and build
sheds repayment before the due date specified in the agreement , giving the
customer different options depending on whether sales are slow or good.
Theories of trade credit
Metzler (1960) was
perhaps the first to emphasize that large firms use trade credit instead of
direct discounts to
push sales in periods when monetary conditions were tight . In addition,
he argued that
firms would accumulate cash balances during periods of loose monetary policy
and
use these to extend
trade credit in periods when monetary conditions were tight . these
macroeconomic
implications of trade credit have recently been studied in more
Mateut and
Guariglia (2006) and Mateut Bougheas and Mizen (2006) who concluded that , in
the
UK Trade credit
increases during periods when monetary policy is tight and Falls bank loans.
The possibility
that sellers who have easier access to the capital market can be encouraged
provide trade
credit to their buyers ( who may not have access to capital markets on the same
terms ) was first
noted by Schwartz ( 1974). A supplier greater ability to raise funds is
used to transfer
credit to their customers. If banks are the main source of credit , then this
suggests
that companies
offering commercial loans would borrow from banks and transmit that accounts
receive ( on their
books ) to buyers.
Cunat (2007 )
argues that companies offering commercial loans may have an advantage over
banks
require repayment
of the debt in a situation where it is difficult for the buyer to find other
suppliers and it is
costly for the seller to find alternative customers. This condition would
met if the product
has a certain technological specificity. This advantage stems
because suppliers
can threaten buyers with stop deliveries of the right middle
in turn hit
production.
( A) firms with
large stocks of inventories would decrease in accounts receivable and
creditors.
( B ) profitability
will be positively related to both accounts payable and receivable .
( C ) The
relationship between the accounts receivable and accounts payable with a degree
of risk and business
its liquidity
position is indeterminate.
( D) Accounts
receivable would be positively related to bank loans , they are compliments .
Accounts payable
can be either positively or negatively related to bank loans .
The empirical
literature has found quite a strong relationship between the extent of trade
credit offered and
received , and various firm characteristics . A wide variety of variables
different
measurement characteristics of the company have been used to explain the
variations in both inter firm
accounts receivable
and accounts payable.
The determinants of credit policy
The following
aspects of the credit policy :
1 . Level of credit
sales needed to maximize profit.
2 . Credit period
is the duration of the credit , if it can be 15 days or 30 or 45 days etc.
3 . Discount,
discount period and seasonal offers .
4 . Standard credit
customer : 5 Cs of credit :
a . Nature of
knowledge of the client will pay.
b . Capacity -
ability to pay.
c . Capital - the
financial resources of a client.
d. Conditions -
CONDITIONS FOR lending to bad debts
and economic and
market conditions ;
e . The surety .
5. Profits.
6 . Market and
economic conditions.
7 . Collection
policy .
8 . Paying habits
of customers .
9 . The efficiency
of billing, record keeping, etc.
10 . Lending - the size
and age of receivables
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