What does trade credit allow an enterprise to do?

What does trade credit allow an enterprise to do?

• A. Purchase items and pay for them immediately
• B. Buy items while deferring payment for an agreed period
• C. Increase the credit limit with banks
• D. Issue more shares to shareholders

Answer: (B)

Trade credit is a financial arrangement that allows an enterprise to purchase goods or services while delaying payment for a set period. This means that businesses can acquire necessary products to operate, sell, or manufacture without the immediate financial burden of having to pay upfront. The ability to defer payment helps improve cash flow, as it allows the enterprise to use its available finances for other operational needs or investments rather than tying up cash in immediate purchases. In practice, this can give enterprises a competitive advantage by enhancing inventory levels without immediate cash outlay, thus facilitating ongoing operations and sales. Such arrangements are typically built on trust between suppliers and buyers, as suppliers rely on the credibility of their clients before extending this form of credit. The other options focus on immediate payments, bank credit limits, or issuing shares, which do not capture the essence of what trade credit specifically enables an enterprise to do in terms of payment deferral.

Trade credit is a financial arrangement that allows an enterprise to purchase goods or services while delaying payment for a set period. This means that businesses can acquire necessary products to operate, sell, or manufacture without the immediate financial burden of having to pay upfront. The ability to defer payment helps improve cash flow, as it allows the enterprise to use its available finances for other operational needs or investments rather than tying up cash in immediate purchases.

In practice, this can give enterprises a competitive advantage by enhancing inventory levels without immediate cash outlay, thus facilitating ongoing operations and sales. Such arrangements are typically built on trust between suppliers and buyers, as suppliers rely on the credibility of their clients before extending this form of credit.

The other options focus on immediate payments, bank credit limits, or issuing shares, which do not capture the essence of what trade credit specifically enables an enterprise to do in terms of payment deferral.