Effects of bank loan constraints on trade credit use: evidence from micro data of Vietnamese firms

Abstract

This paper examines the effects of bank loan constraints on the use of trade credit by Vietnamese firms across size with a comparison between large firms and small and medium-sized enterprises (SMEs). We distinguish three types of bank-constrained firms, i.e. credit denied firms, discouraged firms and those with pending applications; and four types of discouraged firms, i.e. those that did not apply for a bank loan because of burdensome loan procedures, strict collateral requirements, high interest rates and expected denial. Using a sample of 1,000 Vietnamese firms from the World Bank Enterprise Survey in 2005, we find that denied large firms use more trade credit by 5.2% whereas denied SMEs use less of it by 6.7%, implying a substitution and complementary effect respectively. Furthermore, our results suggest that discouraged SMEs because of high interest rates use more trade credit whereas discouraged firms because of expected denial use less of it.