Trade Credit and the Economic Order Quantity—A Further Extension

Abstract

This paper extends the various contributions that have been made in this area, and in particular addresses the following issues: (i) why trade credit is granted, and the effect on the basic model where it is with-drawn; (ii) the legitimacy of certain assumptions in the various models which have been put forward to date; (iii) the interaction of other stockholding costs, such as storage and deterioration costs, with trade credit; (iv) the implications for stockholding where a business can sell goods acquired on credit for cash before the suppliers have to be paid and the order lead-time is less than the credit period. The paper also reviews whether trade credit should be included in the weighted cost of capital, and whether the holding-cost function should include interest received on the sale price, rather than cost.

Keywords:

• finance
• inventory
• investment