Additional Evidence on the Use of Trade Credit by Small Firms: The Role of Trade Credit Discounts

Abstract

This paper uses firm-level data from the 1995 Credit, Banks and Small Business Survey, conducted by the National Federation of Independent Business, to analyze the role of trade credit in the financing of small businesses. A unique attribute of this data set is that it can distinguish between the perceived importance of trade credit to a firm, and the percent of purchases the firm makes on credit. As in previous studies, we find that trade credit use is, at least partially, the result of credit rationing. We extend previous studies by giving a more in-depth analysis of the role played by trade credit discounts. Firms facing credit rationing are less likely to take trade credit discounts, suggesting that credit rationing imposes costs on a firm. Across the entire sample, though, firms that rank trade credit as an important source of funds take discounts as frequently as do other firms. In addition, those firms that have the most discounts available also take discounts more frequently than do other firms. These results suggest that small firms recognize the high cost of foregone discounts, and attempt to avoid these costs.