Trade Credit: Suppliers as Debt Collectors and Insurance Providers

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.