Compare trade credit, instalment payments and leasing
Choose a way to obtain goods or equipment by comparing payment timing, total cost, ownership and contract conditions.
Section 1.1 · Types of business entity
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These lessons cover Topic 1.1 only. The 2029 syllabus has a separate document and is not mapped here. Practice is self-checked, not an official Cambridge grade; full timed-paper practice and human subject-teacher review remain outstanding.
Before you begin
- No prior accounting course is assumed. For each business form, compare who owns it, who controls decisions, who supplies finance and who bears risk.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
A shop receives stock today and pays its supplier in 30 days. Which source is being used?
What you will learn
- Explain supplier trade credit
- Compare paying by instalments with renting or leasing
- Evaluate how funding terms affect cash flow and ownership
Trade credit delays payment to a supplier
Trade credit allows a business to receive goods or services and pay later under agreed supplier terms. It can help working capital when stock is sold before the invoice falls due.
Late payment can damage supplier relationships, trigger charges or interrupt supply. A cash discount may be lost if the business uses the full credit period. Trade credit is not free if its terms have an opportunity cost or penalty.
Instalments and leasing have different ownership terms
Payment by instalments spreads cash outflow over time. Depending on the contract, the business may obtain ownership only after the final payment, or the arrangement may work differently. Check the agreement rather than assume.
Renting or leasing gives use of an asset in exchange for payments, usually without ownership during the agreement. It may reduce the initial cash payment and can include services, but total payments, restrictions, return conditions and maintenance responsibilities depend on the contract.
Pause and explain
What should a business verify before saying that instalment payments will make it the owner of an asset?
Worked example
A bakery needs an oven today, has limited cash and expects to use it for four years. Compare buying in instalments with leasing.
Show the worked solution
- Both options can reduce the initial cash outflow compared with an immediate purchase.
- Check when ownership transfers under the instalment agreement and what happens at the end of the lease.
- Compare total payments, maintenance, flexibility and the bakery's need to own the oven.
Answer Instalments may lead to ownership under the contract, while leasing usually provides use without ownership. The bakery should compare the full cost and conditions over four years, including maintenance, final payments, restrictions and cash-flow resilience.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A supplier offers 30-day trade credit or a 2% discount for payment within 7 days. What is the cash-flow trade-off?
Give me a hint
Compare cash retained with the value of the discount.
Compare my reasoning
- Using 30-day credit keeps cash for longer.
- Paying in 7 days may earn the 2% discount.
- Compare the discount with other funding costs and liquidity needs.
Trade credit preserves cash for up to 30 days but gives up the discount. Early payment saves 2% but uses cash sooner; the business should compare that saving with its liquidity needs and alternative financing cost.
Look for these in your work
- Timing explained
- Discount considered
- Liquidity considered
A company leases a vehicle for four years. The lease includes maintenance, but the vehicle must be returned and annual mileage is capped. Explain two benefits and two limits.
Give me a hint
Use the contract details rather than treating leasing as universally better.
Compare my reasoning
- Maintenance included may make costs more predictable and reduce repair administration.
- The company avoids the full initial purchase price and may preserve cash.
- It does not own the vehicle and must meet return and mileage conditions.
- Compare all lease payments and charges with the value of flexibility and services.
Benefits include avoiding a large upfront purchase and receiving included maintenance. Limits include no ownership, mileage and return restrictions, and total payments that may exceed the value of ownership. The company should compare the full four-year contract with buying.
Look for these in your work
- Two benefits linked to terms
- Two limits linked to terms
- Full-cost comparison
A retailer's inventory sells in 20 days on average, but its supplier invoice is due in 14 days. Explain how trade credit may help and identify a risk that remains.
Give me a hint
Compare the stock-to-cash timing with the payment due date.
Compare my reasoning
- The retailer currently pays 6 days before average inventory turns into sales.
- Longer agreed supplier credit could move payment closer to cash receipt.
- Sales timing varies; the retailer still needs enough cash to meet the due date and may lose discounts or face penalties.
Longer agreed trade credit could reduce the six-day timing gap, but it does not remove the obligation to pay. Slow sales, late customer receipts, missed discounts or late fees can still create a cash problem.
Look for these in your work
- Timing gap calculated
- Supplier terms applied
- Remaining risk explained
Common mistakes
- Assuming every instalment purchase transfers ownership in the same way
- Calling a lease cheaper only because the first payment is smaller
- Ignoring trade-credit due dates and missed discounts
What can you explain now?
What does trade credit change most directly?
Compare with the explanation
The timing between receiving a supplier's goods and paying for them
It is a short-term supplier payment arrangement.
After trying it yourself, choose your next review. This is your self-assessment.
Your review choice appears on Today. Sign in to sync it across devices.
Make it stick
Why should a business compare total contract cost instead of only the first payment?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.