A Comparative Study: Bank Loan V/S Trade Credit, a Panel Data Approach

Abstract

Abstract. Non-financial firms have a unique behavior towards trade credit, where they have complicated constraints on bank loans for a developing economy. There is a huge trading governed by the way of trade credit in this ever emerging trade era. Trade credit is a short-term business financing based on purchases between the buyer and the supplier. In almost every field technology has driven trading to the smart, sophisticated ways of businesses. The current study is concerned with some of these factors especially the trade credit system which is beneficial for the small industries of the country. This is helpful in suitable decision making for business schemes, to overcome those factors which causes obstacles in revenue generation in case of lack of availability of funds from banks and other financial institutions. The demand for trade credit serves the best means of short term financing to the financial distressed firms. Financial sectors including banks require the collateral as guarantee however, customer is usually unable to provide any security and suffers from financial discomfort. The interest rates and documentation keeps the burden on the small investors so they move towards other easy sources of funding as trade credit is suitable for same business dealers. Whereas, trade credit serves the short term loan at easy requirements. This facility is helpful for the customer in flexible way as product price and profit is returned after a short time span. Trade credit regulates the business in a smooth way. The method adopted to pursue the research is by using the panel data of Pakistan non-financial SMEs from 2009–2019, it has been analyzed that although the investments of SMEs are restricted by banks, trade credit can maintain the sustainability of enterprises. Private enterprises are more reliant on trade credit, which can be intensified during periods of monetary tightening. The data is also helpful for SME’s having lack of financial support. Due to the long-term nature and information asymmetry, SMEs experience serious financial constraints that affect their business. The methodology used is Generalized Method of Moments (GMM) formalized by Lars Peter Hansen in 1982. GMM is helpful for the problem raised because of the correlation among the independent variables and the error term known as endogeneity as well as the heterogeneity of firms. The results enlighten that trade credit is the simplest and most demanding method to generate finance for the financially distressed firms as compared to the bank loans and other financial sectors. The conclusion states that the short term financing as trade credit is suitable for small investors as compared to the bank loan and other financial institutions