What is a potential drawback of relying solely on trade credit?

Relying solely on trade credit can lead to immediate cash flow issues because when businesses depend heavily on this type of credit, they may find themselves in a position where they have to repay their suppliers without having the cash flow to do so. If a business delays cash inflows from customer payments or faces unexpected expenses, the reliance on trade credit can become unsustainable. It can create a situation where the company is unable to meet its obligations, leading to potential financial strain or disruptions in operations.

Additionally, while trade credit can be a flexible way of managing short-term financing needs, over-reliance on it without adequate cash reserves can complicate the overall financial health of the business. Thus, if payments are not properly managed or if there are fluctuations in sales, it can contribute to liquidity problems.