Bank Credit and Trade Credit: Evidence from SMEs Over the Financial Crisis
McGuinness, G. and Hogan, T. Bank credit and trade credit: Evidence from SMEs over the financial crisis, International Small Business Journal, June 2016; vol. 34, 4: pp. 412-445., first published on December 10, 2014.
29 Pages Posted: 9 Jun 2016
Date Written: September 1, 2014
Abstract
This paper uses panel data to test the extent to which trade credit has acted as a substitute for bank finance in Small and Medium Sized Enterprises (SMEs), in the aftermath of the financial crisis of 2008. It demonstrates that the reduction in the supply of funds to SMEs was compounded by the contraction of net trade credit within the sector. Nevertheless, trade credit played a vital role in the adjustment of the sector by easing the burden of financial crisis for some SMEs. Thus, the relative importance of trade credit increased for financially ‘vulnerable’ SMEs that were less liquid, highly dependent on short-term bank finance, and with a higher proportion of intangible assets, when entering the crisis. In terms of a redistribution effect; financially stronger firms extended relatively more trade credit, most likely, to financially vulnerable SMEs in aftermath of the financial crisis. In addition, the analysis demonstrates that the financial position of SMEs entering the crisis was more important in determining the impact of the financial crisis on trade credit than company characteristics of age and size.
Keywords: Trade credit, financial crisis SMEs, substitution effect, redistribution effect and panel data
JEL Classification: L26, L14, G20, B41, C33
Suggested Citation: Suggested Citation