Trade credit supply and usage during normal and crisis times: a recent review of literature

Trade credit is an important source of alternative financing for firms, especially among small and medium enterprises (SMEs), when bank credit is scarce. We review the literature on trade credit across previous decades. Many theories underpinning the usage of trade credit assume that trade creditors (suppliers) are better positioned than banks to provide trade credit to their customers for a multitude of reasons. Some theories suggest trade credit is used as a form of transaction warranty or to signal firm quality. In general, empirical studies find evidence consistent with those theories, though there remains debate over the substitutionary and complementary effects between trade credit and bank loans. Firms tend to rely more on trade credit during periods of monetary policy tightening or financial crises. We conclude by proposing some areas for future research on trade credit.