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The financial and operational impacts of European SMEs’ use of trade credit as a substitute for bank credit

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  • Xiaodong Wang
  • Liang Han
  • Xing Huang
  • Biao Mi

Abstract

We study the impacts of the use of trade credit on SME financial performance and operational distress in a sample of 74,036 SMEs across 19 EU countries between 2006 and 2015. Under the premise that trade credit acts as a substitute for bank credit, our results show that supplying trade credit improves profitability, but we show little evidence that such an investment is more profitable for bank credit richer SMEs, although such firms did redistribute more bank fund through trade credit to their customers. For receivers, we show that the use of trade credit finance alleviates operational distress, especially for those SMEs facing liquidity constraints, such as those which have less access to bank credit or under credit tightened periods. This distress reduction effect is also reflected in their profitability indicators. However, the longer the average collection period and credit period, the less effective the trade credit effects respectively on improving SME profitability and reducing operational distress.

Suggested Citation

  • Xiaodong Wang & Liang Han & Xing Huang & Biao Mi, 2021. "The financial and operational impacts of European SMEs’ use of trade credit as a substitute for bank credit," The European Journal of Finance, Taylor & Francis Journals, vol. 27(8), pages 796-825, May.
    • Handle: RePEc:taf:eurjfi:v:27:y:2021:i:8:p:796-825
    DOI: 10.1080/1351847X.2020.1846576
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    Cited by:

    1. Dominika Gajdosikova & Katarina Valaskova & Tomas Kliestik & Veronika Machova, 2022. "COVID-19 Pandemic and Its Impact on Challenges in the Construction Sector: A Case Study of Slovak Enterprises," Mathematics, MDPI, vol. 10(17), pages 1-20, September.
    2. Larissa M. Batrancea & Mehmet Ali Balcı & Leontina Chermezan & Ömer Akgüller & Ema Speranta Masca & Lucian Gaban, 2022. "Sources of SMEs Financing and Their Impact on Economic Growth across the European Union: Insights from a Panel Data Study Spanning Sixteen Years," Sustainability, MDPI, vol. 14(22), pages 1-18, November.
    3. Machokoto, Michael & Mahonye, Nyasha & Makate, Marshall, 2022. "Short-term financing sources in Africa: Substitutes or complements?," Research in International Business and Finance, Elsevier, vol. 60(C).
    4. António Pedro Soares Pinto & Carla Manuela Ribeiro Henriques & Carolina Esteves Oliveira da Silva Cardoso & Maria Elisabete Duarte Neves, 2023. "Bank Credit and Trade Credit: The Case of Portuguese SMEs from 2010 to 2019," JRFM, MDPI, vol. 16(3), pages 1-19, March.

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