European Trade Credit Use and SME Survival

Abstract

This paper examines the role of trade credit in a comprehensive panel of 290,301 SMEs across 15 European countries over the period 2003-2012. The results show that trade credit served as an important source of finance for credit constrained firms, and that the financial position of firms entering the crisis was the main determinant of trade credit use over the financial crisis period. Evidence supporting a significant redistribution effect is reported with cash rich firms extending up to 9 times more net trade credit than their less financially resourced counterparts. Country factors, including banking concentration and the strength of institutional and creditor rights are reported as significant determinants of trade credit use. Distinctively, the paper shows that trade credit significantly reduced the likelihood of firm financial distress and failure. The results are robust to several econometric concerns, including endogeneity arising from possible omitted variables.