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Optimal Trade Credit Limits

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  • Frederick C. Scherr

Abstract

Trade credit limits trigger action in the management of accounts receivable. In practice, these limits are usually set by unaided managerial judgment. This paper develops two methodologies based on wealth maximization: information credit limits and risk credit limits. Information limits signal the need for additional credit investigation. Risk credit limits are maximums applied to order size or accounts receivable balances and represent the point at which the marginal present value of granting further credit becomes negative because of increases in risk or unit costs.

Suggested Citation

  • Frederick C. Scherr, 1996. "Optimal Trade Credit Limits," Financial Management, Financial Management Association, vol. 25(1), Spring.
    • Handle: RePEc:fma:fmanag:scherr96
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    Cited by:

    1. Karca D. Aral & Erasmo Giambona & Ye Wang, 2022. "Buyer’s Bankruptcy Risk, Sourcing Strategy, and Firm Value: Evidence from the Supplier Protection Act," Management Science, INFORMS, vol. 68(11), pages 7940-7957, November.
    2. Greg Filbeck & Thomas M. Krueger, 2005. "An Analysis of Working Capital Management Results Across Industries," American Journal of Business, Emerald Group Publishing, vol. 20(2), pages 11-20.
    3. Rafiu Oyesola Salawu, 2007. "Capital Industry Practice And Aggressive Conservative Working Capital Policies In Nigeria," Global Journal of Business Research, The Institute for Business and Finance Research, vol. 1(2), pages 109-117.
    4. Shi, Xiaojun & Zhang, Shunming, 2010. "An incentive-compatible solution for trade credit term incorporating default risk," European Journal of Operational Research, Elsevier, vol. 206(1), pages 178-196, October.

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