Chapter 7

The concept of trade credit

Tuesday 20th February
Revision
 Revising for mid term test (chapter 1-7)
Learning Summary

In this chapter you will learn about:

 Trade credit
 The advantage and disadvantage of trade credit to entrepreneurs, suppliers
and customers
 The concept of trade credit Tuesday 6th February

L.O. To explain the concept of trade credit in the context

of IGCSE Enterprise.

Starter
 Introduction
Revenue: the money that
comes into an enterprise
from selling goods and
services.
Sometimes an enterprise will not have the money to buy the things that it needs
from its suppliers, but if they don’t buy these things they might not be able to To work out revenue you
continue operating. do a simple calculation:
Selling price x quantity
In these situations some suppliers might let the enterprise have the things it sold = revenue.
needs on a buy-now, pay-later basis.
This is called trade credit.

Trade payable: the
amount of money owed by
the enterprise to
suppliers, such as for raw
material received but not
paid for.
Supplier: a person or
organisation that provides
the goods/materials or
services that an enterprise
needs in order to operate.
Trade credit means that an
Money owed by the
enterprise can buy the
enterprise to its suppliers
items that it needs and
for items bought on credit
then have an agreed
is known as trade
number of days in which to
payables.
pay the supplier.

Or, if the enterprise

This means that the
already has the money to
enterprise can make its
pay the bill, it can be kept
product, sell it, and pay
in the enterprise’s bank
the bill with the revenue
account longer and gain
that it brings in.
more interest.
 If the enterprise pays within
the agreed number of days
then it only pays what was
agreed.
 However, if they go over the
agreed number of days there
will be penalties, such as
percentage increase in the
bill.
 Some agreements also have
rewards for early repayments,
such as a percentage discount
on the agreed price.
 The concept of trade credit Sunday 4th February

L.O. To explain the concept of trade credit in the context

of IGCSE Enterprise.

Starter
 A start up enterprise is unlikely to get trade credit with their
suppliers.
 This is because they have not yet established that they are
financially sound and able to pay their bills on time.
 However, with careful financial planning, it may be possible for even
a start up to negotiate a trade credit deal with suppliers.
 Once an enterprise is more established and has proved that it is
financially sound and able to pay their bills on time, suppliers are
more likely to offer trade credit.
 The key benefit of trade credit for a supplier is that it encourages
repeat custom.
 Trade credit between enterprises and
their customers
 Enterprises might also want to offer their customers trade credit so that they
can benefit from the repeat custom that it often brings.
 The amount of money owed by customers is shown in the accounts as trade
receivables.

There are downsides to offering trade credit to a customer ;

The enterprise does not get the money for their goods or services straight away,
which can cause cash flow problems
Chasing late payments can be costly because of the extra time that takes.
A trade credit is a buy now, pay later system for enterprises.
The enterprise will get the goods from the supplier and pay
them after an agreed period of time. An enterprise may also
offer trade credit to its customers by giving customers the Can all enterprises
goods and receiving payment at a later date. get trade credit?

Who may not be

able to get trade
credit?
 End of chatpter 7 Monday 5th February

L.O. To be able to complete the end of chapter

Starter
 Customer: a person or
Key terms
Service: something that
an enterprise might do for organisation that buys
Revenue: the money that
comes into an enterprise
their customers (such as goods/materials or
from selling goods and
cleaning their windows) services from an
services.
enterprise.
To work out revenue you
Trade receivable: the do a simple calculation:
Trade payable: the
amount of money owed to Selling price x quantity
amount of money owed by
the enterprise by sold = revenue.
the enterprise to
suppliers, such as for raw customers who have had
material received but not goods or services but not
yet paid for them Supplier: a person or
paid for.
organisation that provides
Materials: the raw the goods/materials or
components (such as services that an enterprise
ingredients for a cake) needs in order to operate.
that are needed to make
the finished goods Goods: the finished
Cash flow: the movement product sold by an
of money in and out of an enterprise to its customers
enterprise.
What you should know

 What trade credit means

 The differences in trade credits between an enterprise, a supplier and a

customer

 The advantages and disadvantages of credit for entrepreneurs, suppliers and

customers.