The secret life of UK trade credit supply: Setting a new research agenda

Abstract

Trade credit management represents an important strategic opportunity for firms to enhance performance, liquidity and profitability. This paper synthesises existing understandings of trade credit, with particular (but not exclusive) reference to the UK, with a view to identifying a research agenda in this field. The size, macroeconomic significance, absence of regulation and presence of significant internal risk associated with trade credit suggest that such an enhanced meta-level understanding of this substantial financial market that shadows regular business-to-business operations is imperative. The paper synthesises what is known about the basic parameters of trade credit operations, suppliers' motivations and imperatives for granting credit to trade customers and the factors that determine credit periods and terms. We identify where further research would advance understanding in this area.

Why do firms invest in accounts receivable? An empirical investigation of the Malaysian manufacturing sector

“…Rationally, the risks of investing in AR should be outweighed by the benefits discussed above (Paul and Boden, 2008;Ferrando and Mulier, 2013). Some have argued that the benefits result from a reduction in transaction costs: selling on credit allows firms to accumulate invoices for payment and reduce their transaction costs and this may incentivise them to invest more in AR (Main and Smith, 1982;Petersen and Rajan, 1997;Pike and Cheng, 2001;Soufani and Poutziouris, 2002).…”

“…Some theories emphasise the role of factors such as company size, access to internal/external financing, operating profit and sales revenue growth, liquidity and collateral (Petersen and Rajan, 1997;Soufani and Poutziouris, 2002;Paul and Boden, 2008). Others have added factors such as industry norms (Wilson, 2008;Paul and Boden, 2011), the reputation of the firm's auditor (Gul, et al, 2009;Paul et al, 2012) and ownership (Martínez et al, 2007;Carney and Child, 2012).…”

“…They are more willing to finance their customers' inventory to secure repeat business (Paul and Boden, 2008;Paul, 2010). Thus, those with greater liquidity tend to invest in their less liquid customers by granting them credit.…”

“…Previous research from developed economies has evidenced a variety of reasons as to why firms accept delayed payment and invest in this low-return, high-risk asset (Paul and Boden, 2008). Specifically, although selling on credit increases sales and 1 Henceforth, we shall use goods to mean goods and/or services.…”

“…There has been sustained interest in managing the level of AR from both academics and practitioners, each emphasising the permanent character of this short-term but continuously renewed investment and its strategic potential due to the existence of financial, tax-based, operating, transactional and pricing motives (Asselbergh, 1999;Paul and Boden, 2008). Increasingly, the focus has shifted to the efficiency of AR management and its relationship with profitability, in both developing and developed countries (see, for example, the studies of Michalski (2012) in Poland; Raheman, and Nasr (2007) in Pakistan ;Gill, Biger, and Mathur (2010) in the USA; Singh, Kumar, and Colombage (2017) in India).…”