Suppliers’ trade credit strategies with transparent credit ratings: Null, exclusive, and nonchalant provision

Abstract

Due to poor ability to resist risks, penniless retailers face high bankruptcy risk, which may spread to suppliers who provide trade credit for them and then affect suppliers’ trade credit provision decision. A supplier who transacts with downstream retailers with heterogeneous credit ratings has three trade credit provision strategies: null (the supplier does not provide trade credit), exclusive (the supplier provides trade credit for only a part of retailers), and nonchalant trade credit provision (the supplier provides trade credit for all retailers). In this study, we establish a two-echelon supply chain model comprising one supplier and two capital-constrained retailers to investigate the supplier’s and retailers’ preferences for different trade credit provision patterns. By analyzing and comparing the three trade credit provision strategies, we find that the supplier is always beneficial from providing nonchalant trade credit. However, nonchalant trade credit provision is only attractive for the excluded retailer when his creditworthiness is poor and for the privileged retailer, nonchalant trade credit provision is never a preferable option, which leads to a counterintuitive situation that the three parties can never reach an agreement on trade credit provision pattern. Our results indicate that credit rating information serves as a risk warner for the supplier, allowing the supplier to evaluate the retailers’ repayment ability accurately and set interest rates accordingly, but this is unfavorable to the retailers. For policy-makers, they should start with reducing the risk of default in trade credit to promote the development of trade credit.