Trade Credits: The Case of Small Medium sized Enterprises

Abstract

This paper focuses on testing the theoretical determinants of trade credit, by examining the supply side of the market. It evaluates whether the extension of trade credit is made possible because of access to both external and internal financing, whether those firms experiencing growth in profits and sales offer trade credit, and that price discrimination can possibly motivate the extension of trade credit. We use a large sample of 16,383 companies from the level of accounts receivable depend, on firm’s size, or the type of sector in which firms operate in. We find evidence that larger firms tend to give trade credit, and that from a firms perspective, access to lines of credit from financial institutions can motivate firms to give trade credit. In addition, the results indicate that profitable firms that generate internal funds tend to extend trade credits. There is also evidence that increased sales and trade credits are correlated and that the presence of price discrimination might be a factor in supplying trade credit.