Trade credit and SME profitability

• Published in: Small business economics Vol. 42; no. 3; pp. 561 - 577
• Main Authors: Martínez-Sola, Cristina, García-Teruel, Pedro J., Martínez-Solano, Pedro
• Format: Journal Article
• Language: English
• Published: Boston Springer 01.03.2014; Springer US; Springer Nature B.V
• Subjects: Accounts receivable; Business and Management; Business structures; Business to business commerce; Capital markets; Corporate finance; Corporate profits; Costs; Credit policy; Customers; Economic models; Economic statistics; Economic theory; Empirical evidence; Entrepreneurship; Financial investments; Industrial Organization; Instrumental variables estimation; Investment credit; Management; Managers; Manufacturing; Market share; Market shares; Microeconomics; Product quality; Profitability; Profitable firms; Small & medium sized enterprises-SME; Small and medium sized enterprises; Studies; Suppliers; Trade; Trade credit; Volatility; Spain; Trade credit; L26; Profitability; Accounts receivable; SMEs
• ISSN: 0921-898X; 1573-0913
• DOI: 10.1007/s11187-013-9491-y

Financial literature discusses the motives for trade credit provision by suppliers in depth. However, there is no empirical evidence of the effect of granting trade credit on the profitability of small and medium-sized firms. We examine the profitability implications of providing financing to customers for a sample of 11,337 Spanish manufacturing SMEs during the 2000-2007 period. This article also examines the differences in the profitability of trade credit according to financial, operational, and commercial motives. The findings suggest that managers can improve firm profitability by increasing their investment in receivables and that the effect is greater for financially unconstrained firms (larger and more liquid firms), for firms with volatile demand, and for firms with bigger market shares.