Calculating the Cost of Trade Credit

Trade credit is an important source of liquidity and financing for any company. The company needs to manage its accounts payables effectively and take advantage of the credit period to minimize its cost of funds.

An important decision here is whether it is beneficial for the company to pay within the discount period or pay only by the end of the payment due period.

A company can evaluate trade discounts using the following formula:

$Cost\ of\ Trade\ Credit = (1+\frac{Discount}{1-Discount})^{\frac{365}{Days\ after\ discount\ period}}-1$