cost of trade credit

Firms usually offer their customers some form of trade credit. This allowance comes with certain terms of credit, which will affect the actual cost of asset being sold for the buyer and the seller. Consider this case: Cold Duck Manufacturing Inc. buys most of its raw materials from a single supplier. This supplier sells to Cold Duck on terms of 2.5/15, net 45. The cost per period of the trade credit extended to Cold Duck, rounded to two decimal places, is Cold Duck's trade credit has a nominal annual cost of, assuming a 365-day year. The effective annual rate (EAR) of the supplier's trade credit is If Cold Duck Manufacturing Inc.'s supplier shortens its discount period to five days, this will the cost of the trade credit