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

See all articles by Gerard McGuinness

Gerard McGuinness

Dublin City University; Dublin City University

Teresa Hogan

Dublin City University Business School

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

McGuinness, Gerard and Hogan, Teresa, Bank Credit and Trade Credit: Evidence from SMEs Over the Financial Crisis (September 1, 2014). 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., Available at SSRN: https://ssrn.com/abstract=2788489

Gerard McGuinness (Contact Author)

Dublin City University ( email )

Dublin 9
Ireland

Dublin City University ( email )

Ireland 9
Dublin 9, leinster 9
Ireland

Teresa Hogan

Dublin City University Business School ( email )

Dublin 9
Ireland

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