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(^354) Financial Management
business companies must exercise continuing care to avoid falling into the habit of using
trade credit to excess.
Because suppliers regard the extension of trade credit as a part of their overall sales
promotion programs, they often extend trade credit to many marginally creditworthy
companies-small, new companies and old, declining companies-that do not qualify for
and consequently cannot obtain credit from other sources of short-term funds. It is also
quite easy to get into debt through the use of trade credit.
A company needs only to order additional goods from its suppliers; and if it is occasionally
late in making payment, the sales promotion aspect of trade credit extension may prompt
suppliers to ìlook the other way,î so that the companyís credit reputation may suffer no
immediate harm.
Finally, trade credit is exceedingly useful and valuable precisely because business
companies can usually obtain it when, as, and to the extent that it is needed. When
inventory should be increased to anticipate the seasonal expansion of sales, for example
trade credit will automatically finance a part of the increase. Then, as the seasonal
sales convert into cash through collections, the company may use the funds to reduce
trade payable. For this reason, trade credit is often termed a ìspontaneousî source of
funds.
Thus, a companyís financial officer while assuring that his company benefits from the
availability of trade credit in every legitimate way, should always maintain the business
liquidity required to pay all his companyís bills as they come due. Beyond this, even
considering the extremely high cost of passing discounts, he should certainly plan to pay
all of his companyís trade bills within the discount period. Doing so will have favourable
results, not only on the companyís credit reputation in the trade but, more important, on
its current and long-run profitability as well.
In a negative but equally significant sense, doing so will automatically avoid the possible
financial over extension of the company that could result from its succumbing to the
temptation to use trade credit excessively ìbecause it is thereî.
Commercial Banks advances
Bank credit is the most basic and the most widely used method of short term finance
(apart from trade credit) because of the availability of funds and relatively permanent
source of funds as compared to the trade credit. We will discuss the requirements of
the banks which they take into consideration before accepting the corporate as a client,
then we take a look at RBI Guidelines governing the same including the methods of
calculating the amount that the bank is going to finance and lastly we take a look at
some of the recent issues concerning bank finance.