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Trade Credit: Suppliers as Debt Collectors and Insurance Providers

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  • Vincente Cuñat

Abstract

There are two fundamental puzzles about trade credit: why does it appear to be so expensive, and why do input suppliers engages in the business of lending money? This papers addresses and answers both questions analysing the interaction between the financial and the industrial aspects of the supplier-customer relationship. It examines, how, in a context of limited enforceability of contract5s, suppliers may have a comparative advantage over banks in lending to their customers because they hold the extra threat of stopping the supply of intermediate goods. Suppliers may also act as lenders of last resort, providing insurance against liquidity shocks they may endanger the survival of their customers. The relatively high implicit interest rates of trade credit result from the existence of default and insurance premia.

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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmg_pdfs/dp365.pdf
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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp365.

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Date of creation: Nov 2000
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Handle: RePEc:fmg:fmgdps:dp365

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  1. Oliver Hart & John Moore, 1997. "Default and Renegotiation: A Dynamic Model of Debt," NBER Working Papers 5907, National Bureau of Economic Research, Inc.
  2. Oliver Hart & John Moore, 1991. "A Theory of Debt Based on the Inalienability of Human Capital," NBER Working Papers 3906, National Bureau of Economic Research, Inc.
  3. Mitchell A. Petersen & Raghuram G. Rajan, 1996. "Trade Credit: Theories and Evidence," NBER Working Papers 5602, National Bureau of Economic Research, Inc.
  4. Schwartz, Robert A., 1974. "An Economic Model of Trade Credit," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(04), pages 643-657, September.
  5. Brennan, Michael J & Maksimovic, Vojislav & Zechner, Josef, 1988. " Vendor Financing," Journal of Finance, American Finance Association, vol. 43(5), pages 1127-41, December.
  6. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
  7. Nilsen, Jeffrey H, 2002. "Trade Credit and the Bank Lending Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 226-53, February.
  8. Ferris, J Stephen, 1981. "A Transactions Theory of Trade Credit Use," The Quarterly Journal of Economics, MIT Press, vol. 96(2), pages 243-70, May.
  9. Mian, Shehzad L & Smith, Clifford W, Jr, 1992. " Accounts Receivable Management Policy: Theory and Evidence," Journal of Finance, American Finance Association, vol. 47(1), pages 169-200, March.
  10. Chee K. Ng & Janet Kiholm Smith & Richard L. Smith, 1999. "Evidence on the Determinants of Credit Terms Used in Interfirm Trade," Journal of Finance, American Finance Association, vol. 54(3), pages 1109-1129, 06.
  11. Brick, Ivan E & Fung, William K H, 1984. " Taxes and the Theory of Trade Debt," Journal of Finance, American Finance Association, vol. 39(4), pages 1169-76, September.
  12. Biais, Bruno & Gollier, Christian, 1997. "Trade Credit and Credit Rationing," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 903-37.
  13. Smith, Janet Kiholm, 1987. " Trade Credit and Informational Asymmetry," Journal of Finance, American Finance Association, vol. 42(4), pages 863-72, September.
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Cited by:
  1. Rodríguez Rodríguez, O. Mª, 2005. "El crédito comercial en las pymes canarias desde una perspectiva multivariante," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 23, pages 773-816, Diciembre.
  2. Klapper, Leora & Laeven, Luc & Rajan, Raghuram, 2011. "Trade credit contracts," Policy Research Working Paper Series 5726, The World Bank.
  3. Tim Schmidt-Eisenlohr, 2009. "Towards a Theory of Trade Finance," Economics Working Papers ECO2009/43, European University Institute.
  4. Mihir A. Desai & C. Fritz Foley & James R. Hines Jr., 2012. "Trade Credit and Taxes," NBER Working Papers 18107, National Bureau of Economic Research, Inc.
  5. Daisuke Tsuruta, 2010. "How Do Small Businesses Finance their Growth Opportunities? – The Case of Recovery from the Lost Decade in Japan?," GRIPS Discussion Papers 09-19, National Graduate Institute for Policy Studies.
  6. Fabbri, Daniela & Klapper, Leora, 2008. "Market power and the matching of trade credit terms," Policy Research Working Paper Series 4754, The World Bank.
  7. Andreas Hoefele & Tim Schmidt-Eisenlohr & Zihong Yu, 2013. "Payment Choice in International Trade: Theory and Evidence from Cross-country Firm Level Data," Discussion Paper Series 2013_11, Department of Economics, Loughborough University, revised Oct 2013.
  8. Van Horen, Neeltje, 2004. "Trade Credit as a Competitiveness Tool;Evidence from Developing Countries," MPRA Paper 2792, University Library of Munich, Germany, revised Mar 2005.
  9. Boissay, Frédéric, 2006. "Credit chains and the propagation of financial distress," Working Paper Series 0573, European Central Bank.
  10. Franks, Julian R & Sussman, Oren, 2003. "Financial Distress and Bank Restructuring of Small to Medium Size UK Companies," CEPR Discussion Papers 3915, C.E.P.R. Discussion Papers.
  11. Yothin Jinjarak, 2004. "On the hidden links between financing costs and international trade patterns," Econometric Society 2004 Far Eastern Meetings 501, Econometric Society.
  12. TSURUTA Daisuke, 2009. "Customer Relationships and the Provision of Trade Credit during a Recession," Discussion papers 09043, Research Institute of Economy, Trade and Industry (RIETI).

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