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Lines of Credit from Creditors
Lines of Credit from Creditors
This source of finance really belongs under the heading of working capital management since it refers to short term credit. By a 'line of credit' we mean that a creditor, such as a supplier of raw materials, will allow us to buy goods now and pay for them later. Why do we include lines of credit as a source of finance? Well, if we manage our creditors carefully we can use the line of credit they provide for us to finance other parts of our business.
Take a look at any company's balance sheet and see how much they have under the heading of 'Creditors falling due within one year' - let's imagine it is £25,000 for a company. If that company is allowed an average of 30 days to pay its creditors then we can see that effectively it has a short term loan of £25,000 for 30 days and it can do whatever it likes with that money as long as it pays the creditor on time.
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