How does the cost of costly trade credit generally compare with the cost of short-term bank loans?

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How does the cost of costly trade credit generally compare with the cost of short-term bank loans?

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How does the cost of costly trade credit generally compare with the cost of short-term bank loans?

Explanation & AnswerSolution by a verified expert

Explanation

The costly trade credit is the credit taken by the company in addition to free trade credit however the short-term bank loan  is the temporary loan generally taken to support business or personal capital need.
 
The cost of  costly trade credit is equal to the amount of discount lost whereas the cost of short-term loan includes the principal amount as well as interest amount.
 
The costly trade credit are borrowed for a longer period of time, but the short-term loans needs to be repaid within 6 months or a maximum within 18 months.

Verified Answer

Costly trade credit is the trade credit given over and above free trade credit whereas the short-term bank loans are the loans that are provided by the banks to the customers for a tenure of one year or less.

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