Does trade credit really help relieving financial constraints?

Abstract

The European Union introduced a directive aimed at reducing trade credit due to its supposedly negative effect on the European economy. This contrasts with the redistribution view arguing that trade credit could facilitate the financing of credit‐constrained firms by more liquid suppliers. But does trade credit mainly flow from relatively unconstrained suppliers to more financially constrained buyers? To answer this question, we look at the characteristics of net borrowers with respect to net lenders and then estimate the substitutability between trade and bank debt separately for the two groups of firms. Overall, the results show that, in Italy, efficient redistribution does not tend to prevail in the trade credit market.

Do generous trade credit terms provide a competitive edge?

“…Trying to maintain liquidity, these firms may be more likely to offer early settlement discounts, sell products at lower margins and provide trade credit to financially constrained counterparties, which may themselves struggle to service short-term liabilities. While it is frequently argued that trade credit may help firms overcome financing constraints by providing them with a cheaper alternative to scarce bank financing, it appears common for trade credit to be flowing from constrained firms to the less constrained buyers, who wield a stronger bargaining position (Cosci et al, 2020). If that is the case, trade credit may be negatively associated with operating performance of financially constrained companies.…”

Financial Constraints and the Sustainability of Dividend Payout Policy

“…This condition might be negatively amplified by asymmetric information between parties and moral hazards [6][7][8], which are even more significant if we consider SMEs, since the probability of being under financial constraint depends on a firm's size [9][10][11]. Therefore, it might prove too difficult or excessively costly for SMEs to finance investments and/or other managerial decisions using external resources and, consequently, companies could adopt internal resources if they are available [12,13] or, alternatively, trade credits [14][15][16][17]. Among managerial decisions, the payment of dividends represents one of the most important.…”

Relationship lending and the use of trade credit: the role of relational capital and private information

“…Finally, as firms with more fixed assets may use them as collateral guarantees in their banking relationships, we include a tangibility indicator (Asset Tangibility, computed as tangible fixed assets divided by total assets). Companies that can rely on alternative financing sources use less trade credit in their commercial transactions (Cosci et al, 2020). For this reason, we control for the firm's level of internal capital (Cashflow, expressed in logarithm) and two additional variables: Listed, a dummy variable equal to one if the firm is listed in the stock market, and zero otherwise; and Group, a dummy variable equal to one if the firm belongs to a business group, and zero otherwise.…”

“…First, firm size and firm growth result to be associated with a higher use of trade credit. As firm size can be considered a proxy of market power in the input market, it is reasonable to observe that suppliers lend more money to large customers (Petersen & Rajan, 1997, Dess et al, 2015, Cosci et al, 2020 Firm's liquidity is also positively associated with the amount of accounts payable over total assets. As expected, the liquidity position of the company positively influences the willingness of suppliers to offer credit (Petersen & Rajan, 1997).…”