The Effect of Taxes on the Trade Credit Decision

One of the major sources of short-term financing for most businesses is trade credit. In order to determine whether other forms of short-term financing are superior, textbooks in financial management traditionally suggest a direct comparison between the cost of trade credit and the cost of alternati...

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Bibliographic Details
Published inFinancial management Vol. 13; no. 2; p. 14
Main Authors Brick, Ivan E, Fung, William K H
Format Journal Article
LanguageEnglish
Published Albany, N.Y Financial Management Association International 01.07.1984
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Summary:One of the major sources of short-term financing for most businesses is trade credit. In order to determine whether other forms of short-term financing are superior, textbooks in financial management traditionally suggest a direct comparison between the cost of trade credit and the cost of alternative sources without explicit reference to the effect of taxes. In this paper we model the trade credit decisions incorporating the effect of taxes. We show that taxes affect the timing of cash flows. Depending on the accounting procedure and the level of inventory turnover, the tax credit on purchases impacts on the trade credit decision. Comparisons with the before-tax approach are made by way of numerical examples in order to provide illustrations on the extent of possible biases due to the neglect of taxes on trade credit decisions.
ISSN:0046-3892
1755-053X