Is trade credit a substitute for relationship lending credit?

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Despite its importance to the funding of small enterprises (SMEs), the question of how trade credit is used has not been fully answered. Recently, Uchida et al. (2013) showed that trade creditors can act as relationship lenders. To advance this result, we study the use of trade credit as a substitute for relationship lending credit when firms cannot otherwise obtain such credit. Using a sample of SMEs from the Survey of Italian Manufacturing Firms, we show that when opaque firms seeking relationship credit encounter transactional banks, they retain a greater portion of trade credit in their loans. These firms thus substitute trade credit for their missing relationship credit, because trade creditors are better evaluators of firms than are transactional lenders. The results depend on the size and age of the firm, the nature of the bank, and the size of the firm’s banking pool.

Author(s):

Jérémie Bertrand    
ISA Lille
France

Pierluigi Murro    
LUMSA University
Italy