Trade Credit and the Supply Chain

Abstract: This paper studies supply chain financing. We investigate why a firm extends trade credit to its customers and how this decision relates to its own financing. We use a novel firm-level database with unique information on market power in both output and input markets and on the amount, terms, and payment history of trade credit simultaneously extended to customers (accounts receivable) and received from suppliers (accounts payable). We find that suppliers with relatively weaker market power are more likely to extend trade credit and have a larger share of goods sold on credit. We also examine the importance of financial constraints. Access to bank financing and profitability are not significantly related to trade credit supply. Rather, firms that receive trade credit from their own suppliers are more likely to extend trade credit to their customers, and to “match maturity ” between the contract terms of payables and receivables. This matching practice is more likely used when firms face strong competition in the product market (relative to their customers), and enjoy strong market power in the input market (relative to their suppliers). Similarly, firms lacking internal resources and without access to bank credit, and firms that use more costly informal sources of financing, are more dependent on the receipt of supplier financing in order to extend credit to their customers.