Accounts payable and trade credit work in different ways. As stated by Axia (2010), “Accounts payable are financing vehicles because they represent short-term loans extended, in the normal course of business, by vendors and employees” (¶3, pg. 325). Meaning that accounts payable are monies owed to vendors and/or employees for inventories and/or services that were purchased on credit. Trade credit, on the other hand, is an extension of time in which money for purchases is owed (Axia, 2010). When dealing with accounts payable monies owed for products and/or services such as utilities and other services or, goods may be expected to be paid within as little as 2 to 30 days depending on the billing terms and agreement. Were as when dealing with trade credit, payments may extend over a greater period and a discount may be offered if the amount is paid in full within a certain period (Axia, 2010).
Opportunity costs associated with trade credit are that of other arrangements that may be foregone by using trade credit. If a company or business is unable to pay its debts within the allotted discount period, the annual interest rate of using this type of credit can be expected to be high (Axia, 2010). If unable to pay back debts within the allotted period bank financing may be a preferable alternative to that of trade credit due to the fixed or, variable rate offered by a bank being lower than that of the trade credit interest rate if money is not paid on time. Other options that can be used in place of trade credit include that of bartering, using general accounts payable, and producing needed resources internally.
Short-term bank notes either provide what amounts to permanent financing at short-term rates because most financial institutions that issue these notes allow borrowers of these notes to extend most borrowing arrangements or, renew ones loan (Axia, 2010). This