# Trade Credit and Accruals as Sources of Working Capital

## Meaning

Trade credit is the credit extended by suppliers of goods during the normal course of trade. It is a short-term source of working capital finance, particularly heavily relied upon by Small Scale Industries (SSIs).

## Major Advantages

Easy availability
Flexibility (adjusts naturally with purchases)
Informality (no formal agreement or covenants)

## Is it Really Cost-Free?

It is tempting to think trade credit costs nothing, but it carries an implicit cost:

The supplier ties up its own funds in receivables and bears that opportunity cost.
The supplier recovers this either by raising the price of goods, or by withholding a cash discount that would otherwise have been available.

So the buyer ultimately pays — either as a higher invoice price or as a foregone discount.

## Accruals

Accruals (wages, salaries, taxes, duties paid at period-end) work the same way — they are services used now, paid later. Until paid, they fund working capital at zero explicit cost.

Worked example

### Example 1

Q (RTP): Explain the importance of trade credit and accruals as sources of working capital and their cost.

A: Both are spontaneous, short-term sources arising in the normal course of business — particularly important for SSIs because of easy access, flexibility and informality. The cost is not visible: suppliers recover it through higher prices or by withholding cash discounts; accruals carry no explicit cost while outstanding but build up financial discipline obligations.

⚠️ Common exam mistakes

Claiming trade credit has 'no cost' — examiners want the implicit cost recognised.
Treating trade credit and accruals as long-term finance — they are short-term and spontaneous.

Reference:

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