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Supplier relationships and small business use of trade credit

  • Daniel Aaronson
  • Raphael Bostic
  • Paul Huck
  • Robert Townsend

This paper sheds some light on the empirical importance of supplier relationships, including ethnic ties, for the use of trade credit by minority-owned small businesses. Results based on the 1993 National Survey of Small Business Finance (NSSBF) indicate that ethnic differences in the use of trade credit are present after conditioning on an extensive list of control variables. This holds especially for Black-owned businesses, and we find that they use less trade credit, are less likely to take advantage of discounts for early payment, and are more likely to have payments past due. We use neighborhood survey data to explore the importance of supplier relationships for the use of trade credit by Black- and Hispanic-owned businesses. Although Black and Hispanic owners are equally likely to be offered trade credit, the relationship effects vary by ethnicity. Closer relationships with suppliers as measured by ethnic ties and geographical proximity are associated with more trade credit for Hispanic-owned businesses. In contrast, this result does not hold for Black-owned firms. The neighborhood survey results suggest the idea of looking for ethnic differences in the effects of relationships at the national level as well. Although good supplier-level measures of relationships are not available in the NSSBF, we use census data to construct MSA-level measures of the prevalence of minority-owned businesses. We then explore how location in an MSA with a higher proportion of businesses of the same ethnicity is associated with the use of trade credit by minority owners relative to White-owned firms. We find that a higher MSA share for Hispanic-owned businesses is generally associated with a reduction in differences in the use of trade credit by Hispanic owners relative to White owners. No clear association is apparent between the MSA share for Black-owned businesses and their use of trade credit.Thus, the ethnic differences in the effects of relationships evident in the neighborhood surveys seem to be consistent with the results from the national survey

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-00-28.

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Date of creation: 2000
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Handle: RePEc:fip:fedhwp:wp-00-28
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