Abstract
Inadequate access to finance for small and medium-sized enterprises (SMEs) can present a major impediment to SMEs’ contribution towards driving sustainable economic growth. The aim of this article is to investigate the role of life cycle on SME financing decisions while focusing on trade credit. To this end, we study whether trade credit and its firm-factor determinants differ depending on the stage of life cycle of the SMEs. For the empirical analysis, a sample is employed of manufacturing SMEs operating in 12 European Union countries over the period 2008–2014 and a panel data model with fixed effects is applied. We find that the business life cycle influences trade credit and that this influence is stronger in young firms, although this relation is non-linear across the firms’ life cycle. We further show that the impact of firm-factor determinants on trade credit differs across the business life cycle in terms of magnitude levels. Our results demonstrate that the business life cycle matters when analysing trade credit, and it should therefore be considered when managers and policymakers strive to solve the financial problems of an SME and to consequently incorporate the SME into the sustainable economy.
Highlights
Small and medium-sized enterprises (SMEs) form the backbone of most national economies around the world [1]
Our results show a negative relationship between AGE and trade credit and this effect is statistically significant at the 1% level
This paper examines the effect of a firm’s life cycle on trade credit, a relatively under-researched topic with controversial results in the SME financial literature
Summary
Small and medium-sized enterprises (SMEs) form the backbone of most national economies around the world [1]. In the European Union (EU), they represent 99% of all businesses [2]. These constitute a vital ingredient for the success of the economy and for the adaption of new trends, such as sustainable growth. It is worthy of note that smaller businesses have reduced access to financial markets [3], and they suffer more restrictions regarding credit [4]. These limitations are exacerbated in the particular case of sustainable finance due to insufficient regulation and knowledge, and implementation of sustainability criteria by SMEs [5]. The contribution of SMEs towards driving sustainable growth of economies, such as the EU, can be limited due to this financial restriction
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