Trade Credit Terms Offered by Small Firms: Survey Evidence and Empirical Analysis

35 Pages Posted: 17 May 2002

See all articles by Nick Wilson

Nick Wilson

University of Leeds - Credit Management Research Centre; Leeds University Business School

Barbara Summers

Leeds University Business School; University of Leeds - Division of Management

Abstract

Trade credit has been shown to be an important source of short-term finance for smaller firms but small firms are also suppliers of trade credit. There is little empirical evidence on the credit granting decisions of small firms. Previous empirical work (Petersen and Rajan, 1997; and Ng, Smith and Smith, 1999) has focused on credit granting and investment in accounts receivable in larger firms. In this paper we look at the influences on credit granting for the smallest firms, using a sample of firms with an average of 10 employees. As in previous studies we find that product and demand characteristics influence credit terms. Moreover, we find evidence that firm size affects credit extension choices directly by setting limits on the possibilities for economies of scale, but it also impacts indirectly by affecting the firm's access to finance and its bargaining strength suppliers. The dominant position of larger customers in bargaining with small suppliers constrains the impact of other factors on the firm's choice of credit terms. Small firms are also under pressure to conform to industry norms, although lack of resources can be a limiting factor. Constrained firms may make use of two-part terms in an attempt to improve their cashflow.

JEL Classification: G32

Suggested Citation

Wilson, Nicholas and Summers, Barbara, Trade Credit Terms Offered by Small Firms: Survey Evidence and Empirical Analysis. Available at SSRN: https://ssrn.com/abstract=312711

Nicholas Wilson (Contact Author)

University of Leeds - Credit Management Research Centre ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 4472 (Phone)

Leeds University Business School ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 4472 (Phone)

Barbara Summers

Leeds University Business School ( email )

Leeds, LS2 9JT
United Kingdom

University of Leeds - Division of Management ( email )

United Kingdom

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