Which of the following is not an advantage of trade credit?
A) The amount of extended credit expands and contracts with the needs of the firm.
B) The cost of forgoing the discount is less than the prime rate.
C) Generally no formal agreements are involved in the extension of trade credit.
D) Trade credit is very flexible.

Question

Quizplus · Accepted Answer

Forgoing the discount means that the firm is not taking advantage of the cash discount offered by the supplier for paying the invoice earlier. This implies that the cost of trade credit is higher than the cost of borrowing from other sources, such as banks or financial markets, where the interest rate is typically below the prime rate. Therefore, forgoing the discount increases the effective cost of trade credit and reduces its advantages.

Which of the Following Is Not an Advantage of Trade