"Enviro solution "contruct roof top rain water harvesting in kerela. Company needs fund for making its day to day expenses like wages, electricity, etc. They decide to approach their supplier 'REDDY AND SONS '. They requested 'Raddy and sons ' to gray them credit for purchase of goods and services. this would enable them to buy raw material without making immediate payment..
"Enviro solution 's" financial positions is not very strong and hence it has lost its goodwill. Their past record of payment to its lenders is also not convincing.
A. Identify the source of finance disscussed above.
B. Source is short term or long term.
C. State 3 characteristics of it.
Answers
Source of finance = REDDY AND SONS
SHORT TERM
(A) Trade Credit.
Enviro Solution is trying to get Trade Credit for their business. Trade credit is a type of credit given by the trader to the buyer when purchasing goods and services. Trade credit is allowed so that if the buyer is unable to make the payment for the goods or services he bought right that moment, he is given a credit period to make payment and he can take the goods with him.
(B) Short-term finance.
Trade credit is a short-term source of finance because the supplier will only give you a few months to make the payment for the goods and services.
(C) Characteristics of Trade Credit:
1) Trade credit is a private agreement between the buyer and seller to pay the credit amount on a later scheduled date. It is not a formal agreement, so no legal work is required.
2) Trade credit is only given to companies that have a good reputation for making payments.
3) Trade credit is a short-term source of finance, as the trader will not give more than necessary time to make the payment for the goods and services.