Question

What does the nominal cost of trade credit represent?

Answer 1

Trade credit is the financing offered by the suppliers to the company. Usually the nominal cost of credit is represented in the no of days within which the bill has to be paid and the discount that shall be offered.

For example : The credit terms are 4/15 net 45.

It means that if the company pays offf within in 15 days of the credit period allowed of 45 days , it shall be entitiled to a 4% discount.

Nominal Cost = % of discount / (100 - % of discount) *365 / (Credit Period allowed - Discount Period)

= 4/ 96 * 365 / ( 45-15)

= 50.69%