Justification of sale terms as a way to minimize the cost of trade credit

Abstract

The individual and implicit nature of the trade credit cost can provoke its increase, and, as a result, violate payment discipline and negative influence on the business price.This research is dedicated to improving the sale terms definition to minimize the cost of trade credit. The methods for determining the cost of trade credit of a particular company are proposed to apply, considering the results of the comparative analysis of other enterprises from the same industry. Based on the example of Ukrainian food processing enterprises, it was revealed that 66% of them for the period 2013–2018 had an aggressive policy, and in 44% of the cases, it was connected with the growing role of trade credit. Minimum (23 days) and average (79 days) days payable outstanding, defined in the industry, were equated, respectively, to discount period and payment delay. Considering and comparing the cost of trade credit with alternative financial resources, the marginal level of the discount was determined. Considering the rate of short-term credit, according to the failed discount method, this level is 2.7% for 2018; toward the effective annual rate method – 2.48%. In the case of the overdraft, the marginal discount is 2.9% and 2.66%, respectively.When the actual discount is equal or below this level, the buyer attracts trade credit instead of bank loans. Discount higher than marginal, longer discount period, and cheap alternative financing sources provide early payments, positive financial results, and make trade credit free of charge.

Keywords

• bank loan
• discount
• effective annual rate
• financing policy
• food processing industry
• Ukraine