Investigation of Trade Credit Patterns in Effect with Bank Loan Availability

Abstract

Abstract. This research paper attempts to investigate the behavior of non-financial firms towards the use of trade credit. State owned firms are considered as more credit worthy and the bank loan is easily available to them. We hypothesized that the state owned firms do not face any problem to obtain bank loans. According to trade credit literature the firms with better access to bank loans have a better capacity to grant goods on credit. We have also hypothesized that the bank loan availability makes the non-financial firms able to increase the level of trade credit supply. On the other hand, the bank loan availability makes the non-financial firms able to decrease the level of trade credit demand. We have applied Pooled Ordinary Least Square to estimate the relationship between bank loan availability and the behavior of firms towards the use of trade credit. The results of the study explain that bank loan is easily available to state owned firms and they are also interested to extend more trade credit to their buyers. Most of our results are in line with the theories of trade credit and the previous empirical findings.

Effect of Trade Credit on Firms Growth: A Case Study of Pakistani Non-financial Firms

“…Trade credit thus serves as an edge to the buyer to sustain in the competitive market. This showed a strong and effective use of trade credit in developed as well as developing countries (Ahmed & HUI, 2016). Small companies have more interest to issue trade credit as they have to be more interested to resolve their liquidity issues.…”

“…As, for example, in United Kingdom, debts of short-term nature have observed to be 70 percent account payable from the balance sheet and 50 percent of debt has recorded as compiled debt of the companies. In France, Germany and Italy trade credit has been observed as one-fourth of all the corporate assets and is important where the firm gets limited support from the banks in emerging economies like China as per Ahmed & HUI, (2016). A discount offer is an attractive option from the firms' point of view, because, the cost attached to purchase goods or services is reduced.…”

“…Mostly the use of trade credit has higher in those countries where the production of goods is an integral part of the economy as explained by (Long et al, 1993). Ahmed & HUI, (2016) examined that the use of trade credit is increased after 2008 due to financial crises in Pakistan. Trade credit is more common among the firms facing bank borrowing constraints as banks required security against the loans.…”

Influence of shareholder equity on trade credit demand: The study of non-financial firms in Pakistan

“…Trade credit provides an input for the future growth of the businesses. Trade credit is a two party agreement, which allow them to exchange goods and services without having to engage into the immediate exchange of money (Ahmed & Hui, 2016). Despite the changing conditions in trade, there is always a huge demand for trade credit schemes, which remain a profitable business (Shah et al, 2018).…”