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trade credit

When Credit is More Than Just Financing: The Case of Trade Credit Contracts

Leora Klapper's picture

As most manufacturers around the world can attest, trade credit is an important source of external financing for firms of all sizes. Suppliers—some of whom may be small or credit constrained—generally offer working capital financing to their buyers, reported as accounts receivables (e.g. McMillan and Woodruff, 1999). Research has also demonstrated that trade credit can act as a substitute for bank credit during periods of monetary tightening or financial crisis (see, for example, Love et al., 2007).

Trade credit, however, is not used for financing purposes alone. Trade credit, it has been argued, is a way for a supplier to engage in price discrimination, giving favored or more powerful clients longer terms (see, for example, Giannetti, Burkart, and Ellingsen, 2011). Furthermore, trade credit may simply be customary in an industry, with this particular custom driven by economic rationales such as allowing buyers time to assess the quality of the supplied goods (Lee and Stowe, 1993).