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Trade credit: Suppliers as debt collectors and insurance providers


  • Vicente Cuñat


There are two fundamental puzzles about trade credit: why does it appear to be so expensive,and why do input suppliers engage in the business of lending money? This paper 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 contracts, 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 that 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. The implications of the model are examined empirically using parametric and nonparametric techniques on a panel of UK firms.

Suggested Citation

  • Vicente Cuñat, 2002. "Trade credit: Suppliers as debt collectors and insurance providers," Economics Working Papers 625, Department of Economics and Business, Universitat Pompeu Fabra, revised Feb 2004.
  • Handle: RePEc:upf:upfgen:625

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    References listed on IDEAS

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    Cited by:

    1. Fabbri, Daniela & Klapper, Leora, 2008. "Market power and the matching of trade credit terms," Policy Research Working Paper Series 4754, The World Bank.
    2. Yothin Jinjarak, 2004. "On the hidden links between financing costs and international trade patterns," Econometric Society 2004 Far Eastern Meetings 501, Econometric Society.
    3. Schmidt-Eisenlohr, Tim, 2013. "Towards a theory of trade finance," Journal of International Economics, Elsevier, vol. 91(1), pages 96-112.
    4. Rodríguez Rodríguez, O. Mª, 2005. "El crédito comercial en las pymes canarias desde una perspectiva multivariante," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 23, pages 773-816, Diciembre.
    5. Mihir A. Desai & C. Fritz Foley & James R. Hines Jr., 2016. "Trade Credit and Taxes," The Review of Economics and Statistics, MIT Press, vol. 98(1), pages 132-139, March.
    6. Andreas Hoefele & Tim Schmidt-Eisenlohr & Zhihong Yu, 2016. "Payment choice in international trade: Theory and evidence from cross-country firm-level data," Canadian Journal of Economics, Canadian Economics Association, vol. 49(1), pages 296-319, February.
    7. Van Horen, Neeltje, 2004. "Trade Credit as a Competitiveness Tool;Evidence from Developing Countries," MPRA Paper 2792, University Library of Munich, Germany, revised Mar 2005.
    8. Leora Klapper & Luc Laeven & Raghuram Rajan, 2012. "Trade Credit Contracts," Review of Financial Studies, Society for Financial Studies, vol. 25(3), pages 838-867.
    9. Boissay, Frédéric, 2006. "Credit chains and the propagation of financial distress," Working Paper Series 573, European Central Bank.
    10. Franks, Julian R & Sussman, Oren, 2003. "Financial Distress and Bank Restructuring of Small to Medium Size UK Companies," CEPR Discussion Papers 3915, C.E.P.R. Discussion Papers.
    11. Daisuke Tsuruta, 2010. "How Do Small Businesses Finance their Growth Opportunities? – The Case of Recovery from the Lost Decade in Japan?," GRIPS Discussion Papers 09-19, National Graduate Institute for Policy Studies.
    12. TSURUTA Daisuke, 2009. "Customer Relationships and the Provision of Trade Credit during a Recession," Discussion papers 09043, Research Institute of Economy, Trade and Industry (RIETI).

    More about this item


    Trade credit; debt enforceability; liquidity;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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