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Mounting evidence indicates that firms, particularly SMEs, suffered from a significant credit crunch during this crisis. We analyze for the first time whether trade credit provided an alternative source of external finance to SMEs during the crisis. Using firm‐level Spanish data we find that credit constrained SMEs depend on trade credit, but not bank loans, and that the intensity of this dependence increased during the financial crisis. Unconstrained firms, in contrast, are dependent on bank loans but not on trade credit.

Theoretical models of lending and industrial organization theory predict that firm access to credit depends critically on bank market structure. However, empirical studies offer mixed results. Some studies find that higher concentration is associated with higher credit availability consistent with the information hypothesis that less competitive banks have more incentive to invest in soft information. Other empirical studies, however, find support for the market power hypothesis that credit rationing is higher in less competitive bank markets. This study tests these two competing hypotheses by employing for the first time a competition indicator from the Industrial Organization literature -the Lerner index -as an alternative to traditional measures of concentration. We test the information and the market power hypotheses using alternative measures and firm borrowing constraints. We find that the results are sensitive to the choice between IO margins and traditional concentration measures. In particular, the HHI seems to support the information hypothesis while the Lerner index supports the market power hypothesis. The Lerner index, however, is found to be a more consistent indicator of market power across different measures of financing constraints. Moreover, the Lerner index is found to exhibit the larger marginal effect on the probability that a firm is financially constrained among a large set of firm level, bank market and environmental control variables. Our results are robust to alternative measures of financial constraints and cast doubt on the validity of relying on concentration measures as proxies of competition in corporate lending relationships (247 words).

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