Financing firms with restricted access to financial markets: the use of trade credit and factoring in Belgium

Abstract

Many authors emphasize the implications of restricted access to financial markets for both small and new firms. The paper reports investigations into the use of alternative means of financing. More specifically, the use of trade credit and factoring are examined. Indeed, following the trade credit management literature both institutional and macro economic restrictions on small business finance can be overcome by ‘larger suppliers’ extending trade credit to their smaller customers. However, the DSO-rate cannot be used to measure the supplier's willingness to invest in trade credit as it depends on both suppliers' and customers' characteristics. The decision to extend trade credit is therefore approximated by the will to control its management and operationalized by the decision to factor or not to factor. The results of our study are twofold. First, factoring is mainly used by small and medium-sized companies. Moreover, when looking at the characteristics of the factor's customers, new companies facing huge capital expenditure programmes and seasonal sales decide to factor. The prejudice about factoring being a last resort means of finance is, however, not supported: companies that decide to use factoring are indeed less profitable, but this is simply due to their high growth and/or capital intensive investment programmes.