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Trade credit and customer relationships

  • Barbara Summers

    (Accounting & Finance Division, Leeds University Business School, University of Leeds, Leeds LS2 9JT, UK)

  • Nicholas Wilson

    (Credit Management Research Centre, Leeds University Business School, University of Leeds, Leeds LS2 9JT, UK)

Trade credit is an important economic phenomenon, and a variety of theories have been put forward to explain the decisions firms make on credit extension. The ways in which credit can be used as a strategic tool to support corporate objectives has not, however, been fully discussed. The results presented here provide some support for the extant theory on trade credit extension and for recent empirical papers in this area (e.g. Ng et al., 1999; Petersen and Rajan, 1994). However, our results suggest that trade credit granting has a set of subtle and complex motivations over and above those predicted by standard theory. In particular trade credit extension can be used as a many-faceted marketing|relationship management tool and|or as a means of signalling information to the market or to specific buyers about the firm, its products and its future prospects|commitment. Much of credit extension can be seen as customer focused; for example, encouraging frequent purchasers which offer the potential for relationship development or accommodating customers' demand for credit to help finance their production period. The requirements|bargaining power of large customers can influence a firm to extend more credit. Firms will vary terms in anticipation of capturing new business, to attract specific customers and in order to achieve specific marketing aims. Copyright © 2003 John Wiley & Sons, Ltd.

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Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 24 (2003)
Issue (Month): 6-7 ()
Pages: 439-455

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Handle: RePEc:wly:mgtdec:v:24:y:2003:i:6-7:p:439-455
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  1. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
  2. Nadiri, M Ishaq, 1969. "The Determinants of Trade Credit in the U.S. Total Manufacturing Sector," Econometrica, Econometric Society, vol. 37(3), pages 408-23, July.
  3. Smith, Janet Kiholm, 1987. " Trade Credit and Informational Asymmetry," Journal of Finance, American Finance Association, vol. 42(4), pages 863-72, September.
  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.
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