Free and Costly Trade Credit: A Comparison of Small Firms

Abstract

Trade credit is a major source of financing for small firms. This article examines the extent to which small firms use trade credit as well as the extent to which they use "free" versus "costly" trade credit. Those firms that use free trade credit make payment within the discount period. Alternatively, firms that use costly trade credit forego available discounts and may also make payment after the due date thereby incurring substantial additional costs. Results reveal that larger firms were more likely to use trade credit. Younger firms were more likely to be denied trade credit and were also more likely to pay late as were firms with a history of credit difficulties and those with high levels of debt. Firms owned by white women and Hispanic men were significantly less likely to have trade credit than firms owned by white men. Further, firms owned by black men were significantly more likely to be denied trade credit.