Question

Krishna Tech Ltd., a growing Start-up in the Robotics industry, needs finance to meet its working capital requirements. Prerna Ltd., an Ed-Tech Company, had purchased Robotics Training Kits and Equipment from Krishna Tech Ltd. with a credit period of three months and is due to pay ₹ 15,00,000 on 30th July 2025.

Based on the above information, suggest a suitable form of short-term financing that Krishna Tech Ltd. can opt for. Explain any three of its features.

Answer 1

Trade credit is a short-term financing method where a supplier allows a buyer to purchase goods or services and pay for them at a later date, usually within a specified period, without incurring interest charges if paid on time. It is a common practice in business-to-business transactions and is often seen as a way to manage cash flow and build supplier relationships.

Key Features of Trade Credit:

1. Short-term financing: Trade credit typically covers a period of 15 days to 3 months, usually extended for 30, 60, or 90 days (sometimes longer depending on the relationship). This makes it a useful tool for managing working capital.
2. No immediate payment: The buyer receives goods or services and pays later, often within a pre-agreed timeframe.
3. Potential for interest-free credit: If the buyer pays within the agreed-upon period, trade credit is often interest-free, making it a cost-effective financing option.
4. Flexibility in payment terms: The specific terms of trade credit (e.g., credit period, discounts for early payment) are usually negotiated between the buyer and supplier and can vary based on factors like the relationship, the buyer’s credit worthiness and the industry.
5. Minimal documentation: It involves simple documentation like invoices or delivery notes.
6. Potential for discounts: Suppliers might offer discounts for early payment, encouraging buyers to settle their dues sooner.
7. Impact on cash flow: Trade credit helps businesses manage their cash flow by allowing them to delay payments while still utilising the purchased goods or services.