Using trade payables as a source of finance has which disadvantage?

Using trade payables as a source of finance has which disadvantage?

• A. It alleviates cash flow difficulties
• B. It could obtain a poor credit rating
• C. It could lead to a loss of any settlement discount
• D. It has no effect on cash flow

Answer: (C)

Using trade payables as a form of financing lets a business delay cash outflows to suppliers, which can help improve short-term liquidity. The downside is the risk of missing any settlement discounts offered for early payment. If a supplier provides a cash discount for paying within a set period and you delay to the extended due date, you forfeit that discount, effectively increasing the cost of the purchases financed by the trade payable. For example, paying 980 instead of 1,000 to take a 2% discount is cheaper than paying 1,000 later; if you skip the discount by waiting, you’re paying extra. So the main disadvantage is the potential loss of any settlement discount, which erodes the benefit of using supplier credit.

Using trade payables as a form of financing lets a business delay cash outflows to suppliers, which can help improve short-term liquidity. The downside is the risk of missing any settlement discounts offered for early payment. If a supplier provides a cash discount for paying within a set period and you delay to the extended due date, you forfeit that discount, effectively increasing the cost of the purchases financed by the trade payable. For example, paying 980 instead of 1,000 to take a 2% discount is cheaper than paying 1,000 later; if you skip the discount by waiting, you’re paying extra. So the main disadvantage is the potential loss of any settlement discount, which erodes the benefit of using supplier credit.