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Explain five reasons why a firm would prefer trade credit to a bank loan.

Answers

- There is no interest charged when goods are taken on credit but loan have to be paid with interest.
- No collateral is required when taking goods on credit but a loan requires collateral.
- Acquiring a bank loan involves long procedures while trade credit does not involve long procedures.
- Money borrowed from a bank can be channeled to other uses but not so with goods taken on credit.
- To get a loan a firm must have a healthy bank account which I not possible hence firms will go for trade credit.
- The collateral pledged for a loan may not be used by the firm during the loan period but that does not occur when taking goods on credit.

sharon kalunda answered the question on September 4, 2019 at 12:21

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