CHAPTER ONE
Introduction
1.1 Background of the Study
In the business environment, trade credit is not a new thing. It has been in existence with business and has continued to develop with it. The complexity of modern business environment and the increased volume of transition have conferred on trade credit. According to Oluwi (1990), trade credit is a vital tool in the development of trade and industries. This important instrument, if granted unchecked can bring about disastrous effect on a company. According to Kishore (2004), trade credit is usually abused by buyer who fails to honour their own part of credit obligation by defaulting in payment. This situation is very common in the business world today and often creates apprehension on the usefulness of trade credit. Some company or business are so much afraid of granting trade credit to buyer to the extent that credit worth customers have been denied the opportunity of obtaining goods and services on credit resulting in both the supplier and purchaser loosing the benefit of trade credit. Those who have granted credit are afected by default in payment and suffering the adverse effect it has on their financial position. Defect in payment of debit generally bring about debt which can lead to legal bankruptcy of the company. Incidence of default in payment is not favourable to the development of trade and industry and does not indicate proper management and control of trade credit. To every firm or organisation, various finance alternatives are available such as short-term medium term and long-term sources of finance. According to Omolumo (2003), short-term source of finance, which include trade credit can simply said to be capital made available for a short period of time, ranging from one day to, say, twelve financial months. This type of short term fund is generally needed to manage the working capital of a business and, usually, it is financed with short-term borrowing. According to Pandey (2005), trade credit can simply refers to the credit that a customer gets from suppliers of goods in the normal course of business. According to Olubi (1990), defines that trade credit is extended by one company to another on the purchase and sales of goods and equipment. He also said that trade credit is one of the most important forms of short term finance in the economy.
1.2 Statement of Problem
Trade credit is not without its own problem in adequate trade management and control leads to bad debt, low profit.
– Distortion in production activities
– Excessive granting of credit.
– Increase in trade credit risk.
– Hindrance in the department of trade and industries. Also, if the opportunity of trade credit is not given to credit worth customer, the company may loose substantial sales which in turn affect their returns. Various bad debt that arises from trade credit given to the customers, if granted unchecked can bring about a disastrous effect on a company. So credit given to customer must be properly managed and checked so as to guide against default in payment.