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Trade credit and SME profitability

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  • Cristina Martínez-Sola
  • Pedro García-Teruel
  • Pedro Martínez-Solano

Abstract

Financial literature discusses the motives for trade credit provision by suppliers in depth. However, there is no empirical evidence of the effect of granting trade credit on the profitability of small and medium-sized firms. We examine the profitability implications of providing financing to customers for a sample of 11,337 Spanish manufacturing SMEs during the 2000–2007 period. This article also examines the differences in the profitability of trade credit according to financial, operational, and commercial motives. The findings suggest that managers can improve firm profitability by increasing their investment in receivables and that the effect is greater for financially unconstrained firms (larger and more liquid firms), for firms with volatile demand, and for firms with bigger market shares. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Cristina Martínez-Sola & Pedro García-Teruel & Pedro Martínez-Solano, 2014. "Trade credit and SME profitability," Small Business Economics, Springer, vol. 42(3), pages 561-577, March.
  • Handle: RePEc:kap:sbusec:v:42:y:2014:i:3:p:561-577
    DOI: 10.1007/s11187-013-9491-y
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    More about this item

    Keywords

    Accounts receivable; Trade credit; Profitability; SMEs; L26;
    All these keywords.

    JEL classification:

    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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