Determinants of Supply and Demand for Trade Credit by Micro, Small and Medium-Sized Enterprises

Abstract

This article investigates the determinant factors of supply and demand for trade credit by micro, small and medium-sized enterprises (MSMEs), using data collected in a survey of managers from 481 firms in 32 cities in the states of São Paulo and Minas Gerais (Brazil) between 2008 and 2010. The multivariate relationship model proposed here is grounded in trade credit, agency and transaction costs theories. This study is based on a technique known as path analysis that uses a system of simple regressions estimated by simultaneous equations. The main results show the following: (i) trade credit and short-term bank loans are supplementary (and not substitute) sources of funds for MSMEs, which demonstrates that trade credit can be used by financial institutions as an indicator of the creditworthiness of the company; (ii) the proportion of credit sales, the days sales outstanding measure and sales growth are positively related to the amount of trade credit demanded, which suggests that trade credit is transferred along the supply chain; and (iii) the supply of trade credit is positively related to the importance that management ascribes to both internal capital and bank credit, which illustrates the strategic use of the supply of trade credit to increase sales. These results have important implications for companies' managers, financial institutions and the government agencies responsible for formulating policies that support and promote the development of small and medium-sized enterprises.

Access to Trade Credit by Informal Firms in Ghana: Does Locating in Industrial Cluster and Holding Production/Supply Contract Matter?

“…Trade credit may serve as a substitute or complement to other alternative sources of financing working capital. While some empirical evidence supports substitution relationship between trade credit and bank loan (e.g., Garcia-Teruel & Martinez-Solano, 2010; Kwenda & Holden, 2014), other empirical evidence supports a complementary relationship (e.g., Carvalho & Schiozer, 2015;Vaidya, 2011;Fisman & Raturi, 2004). Access to other external sources for financing working capital -credit from moneylenders (MLNDER), microfinance institutions (MFI), banks (BANKS) and friends (FRNDS) -are thus included in the econometric analysis.…”

“…As a source of financing, trade credit comes in two forms: (1) supplier credit and (2) prepayment/advanced payment. Supplier credit is trade credit received from input suppliers upstream; this is generated when firms receive inputs from suppliers upstream and payment is delayed or deferred to a later date (Ng, Smith & Smith, 1999;García-Teruel & Martínez-Solano, 2010;Carvalho & Schiozer, 2015). Prepayment/ advanced payment is trade credit received from customers downstream who make payment preceding the delivery of goods (e.g., Schwartz, 1974;Ferris, 1981;Fafchamps, Pender and Robinson, 1995;Mateut, 2014).…”

Trade Finance in the Polish Corporate Sector: Balancing Growth and Financing Constraints

“…Other studies (Chant, Walker, 1988) suggest that trade finance may be both a substitute and a complement to bank credit. Yet another study (Carvalho, Schiozer, 2015) reports that trade credit is complementary to bank credit. Therefore, trade credit may be used by financial institutions as an indicator of the company's creditworthiness.…”

“…Growth opportunities P/BV ratio + Constrained growth companies are more likely to rely on the trade credit channel (Yazdanfar, Ohman, 2015) H3 (Carvalho, Schiozer, 2015). Argument in favour of the trade credit channelling theory.…”

Does Islamic Label Indicate Higher use of Trade Credit? Evidence from Shar¯ı‘ah Compliant Non-financial Firms in Pakistan

“…TC plays a significant role for firm financing & investment and thus it flows like supply and demand channel from one to another (Carvalho & Schiozer, 2015). TC is also considered as an alternative of bank credit when there are financial crises in an economy (Love, Preve, & Sarria-Allende, 2007).…”