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

Costly trade credit is the credit taken by the company in addition to free trade credit. It means if the firm fails to make the payment within stipulated time then it has obtained additional trade credit. However, short-term loan is the temporary loan generally taken to support business or personal capital needs.
The cost of costly trade credit is equal to the amount of discount lost, whereas the cost of short-term bank loans is equal to the borrowed amount plus interest expense.

Verified Answer

Costly trade credit is the trade credit which is given over and above free trade credit whereas short-term bank loans is the amount borrowed by the companies from banks for a tenure of one year or less.

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