On the Determinants and Dynamics of Trade Credit Use: Empirical Evidence from Business Start‐ups

Abstract

Business start-ups provide an excellent opportunity for testing various hypotheses on why firms use trade credit. At the time of start-up, failure risk and financial constraints are typically large. Also, start-ups have no established relationships with banks and suppliers. The literature has related all these features to trade credit use. Moreover, as firms grow older, these characteristics become less pronounced, allowing us to test the dynamics of trade credit use. We find that start-ups use more trade credit when financial constraints are large, when suppliers have a financing advantage over banks in financing high-risk firms, when entrepreneurs value private benefits of control and when transaction costs are important. Furthermore, the dynamic implications of these theories are supported.

Interaction Between Trade Credit And Debt: Evidence From The Italian Market

“…In fact, payables are likely to depend on the bargaining power of the firm over its supplier (Van Horen 2005), so firms are more likely to finance receivables with payables and to match the maturity when they simultaneously enjoy stronger market power in the input market and face stronger competition in the output market (Fabbri and Klapper, 2008) As a consequence of the tendency of firms to extend and accept delayed payments, predictive models of the net exposure on trade credit feature a higher level of accuracy than predictive models of the gross exposure, whereas the relevance of firm-specific variables is affected by the choice to consider the net exposure instead of the gross exposure (Gibilaro and Mattarocci, forthcoming). As the trade credit position is affected by the life cycle of the firm, the analysis of the net exposure enables the consideration of the changing use of trade credit by firms over time (Huyghebaert, 2006). …”

The predictability of financial, accounting‐based, and industrial factors on the success of newly incorporated Spanish firms

“…The research of Huyghebaert (2006) as well as shows that: high failure rates, as one of the features of start-ups, would cause limitations for start-ups to get bank loans, thus relying on supplier financing (although this relationship may change as time goes by); financial constraints, no history, and no established relationships with banks and suppliers also promote the use of trade credit; and private benefits of control (featured as highly concentrated ownership in start-ups) could be a reason for entrepreneurs to decrease the reliance on bank debt when starting up.…”

Determinants of Trade Credit in European Construction Firms: a Preliminary Study

“…By panel-data regressions, the main findings were these: firms end up using a mix of trade credit and bank loans trade (Yang, 2011), credit reduces treasury uncertainties (Brennan et al, 1988), trade credit can be a loan substitute for firms that were shut out of formal credit markets (Cull et al, 2009); trade credit can be both a substitute for and a complement to bank credit (Chant and Walker, 1988;Yang, 2011), trade credit is a complement to bank credit (Ono, 2001), trade credit offers control benefits in the early stages of a venture (Huyghebaert, 2006). …”