Evidence on the Determinants of Credit Terms Used in Interfirm Trade

Abstract

Trade credit is created whenever a supplier offers terms that allow the buyer to delay payment. In this paper we document the rich variation in interfirm credit terms and credit policies across industries. We examine empirically the firm's basic credit policy choices: whether to extend credit or to require cash payment; and, if credit is extended, whether to adopt simple net terms or terms with discounts for prompt payment. We also examine determinants of variations in two-part terms. Results are supportive primarily of theories that explain credit terms as contractual solutions to information problems concerning product quality and buyer creditworthiness.TRADE CREDIT HAS IMPORTANT ECONOMIC SIGNIF ICANCE from both micro-and macroeconomic perspectives. During the 1990s vendor financing has accounted for an average $1.5 trillion of the book value of all assets of U.S. corporations and has represented approximately 2.5 times the combined value of all new public debt and primary equity issues during a given year. As a component of the money supply, trade credit, in the form of accounts payable, exceeds the primary money supply~M1! by a factor of 1.5 on average. 1 Clearly, efforts to control economic growth through monetary policy can be confounded by aggregate decisions of businesses to increase or decrease reliance on trade-credit financing.Several recent empirical studies examine determinants of firm reliance on trade credit. 2 These studies model supply and demand for trade credit using financial-statement data~accounts receivable and payable!. 3 However, many aspects of trade-credit practice are unexplored. Most notably, little is known about the types of credit terms~e.g., net 30, 2010 net 30! and credit policies that are observed across firms and industries.

Trade Credit: Suppliers as Debt Collectors and Insurance Providers

“…The term δ(R − r)(α − γ) is the excess productivity of the mature technology with respect to the startup technology from the customer point of view; or in other words how much more productive is the specific technology when compared to the generic one. 18 This term can also be seen as a measure of the degree of specificity of the specific technology. If either R = r or α = γ, the advantage of the mature technology would not exist.…”

“…The other one, determined by d = 1 − βθ, implies infinite investment and negative profits for the customer in every stage of production. 18 Investing one unit in the mature stage gives an expected value of β (c + θ + γR + (1 − γ)r) , while investing one unit in the startup stage gives β(c + θ + αR + (1 − α)r − υL). The difference between these two terms is in fact…”

Do firms use the trade credit channel to manage growth?

“…The firm can increase its sales by allowing delayed payments, such that the customer can witness the quality before paying (Ng et al, 1999;Deloof and Jegers, 1996). Finally, firms provide more trade credit to customers that are in temporary distress.…”

On the Ethics of Trade Credit: Understanding Good Payment Practice in the Supply Chain

“…Trade credit is a major source of external financing for companies (Ng et al 1999;Stern and Chew 2003;Horne and Wachowicz 2001). Using a sample of large traded nonfinancial firms of the G-7 countries, Cuñat and GarciaAppendini (2012) observed that trade credit taken (accounts payable) represents, on average, a sizeable 11.5-17 % of total assets.…”