On the Ethics of Trade Credit: Understanding Good Payment Practice in the Supply Chain

Abstract

In spite of its commercial importance and signs of clear concern in public policy arenas, trade credit has not been subjected to systematic, extended analysis in the business ethics literature, even where suppliers as a stakeholder group have been considered. This paper makes the case for serious consideration of the ethics of trade credit and explores the issues surrounding slow payment of debts. It discusses trade debt as a kind of promise, butnoting that not all promises are good ones-goes on to develop an analysis of the ethics of trade credit grounded in an understanding of its fundamental purpose. Making a distinction between ''operating'' trade credit and ''financial'' trade credit, the paper provides an account of the maximum period for which it is appropriate for one company to delay payment to another from which it has purchased goods or services. The concern of commentators and policy makers that companies should not take too long to pay their debts is affirmed, but the understanding of what timely payment means is significantly finessed, with one conclusion being that, if debts have not already been settled according to acceptable standard terms of trade, cash should pass quickly back along the supply chain once the customer in the final product market has paid. The analysis has implications not only for companies that take credit but also for external parties that seek to rate companies or set regulations according to speed of payment-an approach that is shown to be misleadingly simplistic, albeit well intentioned. A corresponding important responsibility for suppliers, not to extend excessive credit (and thus act as a quasi-bank), also follows from the analysis developed. Having provided a novel analysis of an important business problem, the paper then discusses some of the related practical issues and makes suggestions for further research.

The Social Efficiency for Sustainability: European Cooperative Banking Analysis

“…The customer loans (CC) input is relevant for social efficiency because it is the main financial resource of households and corporations [2,34], and is therefore necessary for social value. It is desirable, but not possible, to analyze the type of credit because depending on the aim as the level of social assistance will vary [60]. Nevertheless, as they could be necessary for social value, and because there is a lack of information regarding the exact purpose of the loans, they will all be considered in the same category.…”

Ethics of FinTech and Trading

“…The following paragraphs draw upon my experience as a leader in the FinTech industry and Leire San-Jose and Christopher J. Cowton’s paper on the ethics of trade credit (Cowton and San-Jose 2017 ). The need for a formal standard to distinguish between “operating” trade credit and “financial” trade credit …”

“…Cowton and San-Jose point out that “Trade credit is created when a supplier provides goods or services to another firm in the expectation that payment will be received at a date in the future. Instead of payment in cash or near-cash, the goods or services are supplied “on credit,” usually with an invoice that specifies the payment terms ( e.g., payment to be received within 30 or 60 days).” (Cowton and San-Jose 2017 , p. 674).…”

“…However, it puts a strain on suppliers’ own financial resources because goods or services are produced and provided without, at least for a time, receiving cash. (Cowton and San-Jose 2017 , p. 674) “Man is born free, but he is everywhere in chains” (Rousseau 1762 ). “Rousseau asserts that modern states repress the physical freedom that is our birthright, and do nothing to secure the civil freedom for the sake of which we enter into civil society.…”

“…However, it puts a strain on suppliers’ own financial resources because goods or services are produced and provided without, at least for a time, receiving cash. (Cowton and San-Jose 2017 , p. 674)…”