Provision Of Trade Credit Research Articles

Optimal manufacturer's pricing and lot‐sizing policies under trade credit financing

AbstractIn this paper, we extend Goyal's economic order quantity (EOQ) model to allow for the following four important facts: (1) the manufacturer's selling price per unit is necessarily higher than its unit cost, (2) the interest rate charged by a bank is not necessarily higher than the manufacturer's investment return rate, (3) the demand rate is a downward‐sloping function of the price, and (4) an economic production quantity (EPQ) model is a generalized EOQ model. We then establish an appropriate EPQ model accordingly, in which the manufacturer receives the supplier trade credit and provides the customer trade credit simultaneously. As a result, the proposed model is in a general framework that includes numerous previous models as special cases. Furthermore, we provide an easy‐to‐use closed‐form optimal solution to the problem for any given price. Finally, we develop an algorithm for the manufacturer to determine its optimal price and lot size simultaneously.

Trade credit and bank credit: Evidence from recent financial crises

This paper studies the effect of financial crises on trade credit for a sample of 890 firms in six emerging economies. Although the provision of trade credit increases right after a crisis, it contracts in the following months and years. Firms that are financially more vulnerable to crises extend less trade credit to their customers. We argue that the decline in aggregate trade credit ratios is driven by the reduction in the supply of trade credit that follows a bank credit crunch, consistent with the “redistribution view” of trade credit provision, whereby bank credit is redistributed via trade credit from financially stronger firms to weaker firms.

Inventory management under date-terms supplier trade credit with stochastic demand and leadtime

Executives and academics alike are expressing increasing interest in supplier trade credit. We consider a form of credit known as ‘date-terms’ where the credit period extends to a specified date in the month following the invoice. We extend published research to consider both demand and supply uncertainty, employing a gamma distribution to model demand during the leadtime and reorder period. Taking an applied perspective, we evaluate four heuristics against an optimal solution for the case where pragmatic restrictions are placed on the reorder period. We evaluate how the reorder period and the performance of heuristics are affected by various environmental parameters (based on industrial data) and comment on the ramifications of this form of trade credit.

The Principles of Exporter-Provided Trade Credit Risk Model

The issue of trade credit risk evaluation, from an exporter‘s point of view is analysed in the article, i.e. sources and evaluation possibilities of the risk. Assessing exporter-provided trade credit risk, it is essential for the exporter to identify to which obligor it is rather safe to provide trade credit (negligible or moderate default probability) and which obligor has large probability to default. Credit risk evaluation for exporting companies is more complicated than for firms trading with local partners only, because of the following reasons: firstly, customer is located in another country and therefore it is more complicated to get information about customer‘s reliability. Secondly, there are more factors influencing exporter‘s credit risk as the credit risk is influenced by foreign country‘s political situation, economic stability, etc. Exporter experiences the largest impact and, therefore, losses in the case of customer’s (obligor’s) default, since the creditor (exporter) has a scarce probability to get the money back. Therefore one of the main factors evaluating trade credit risk is obligor’s default risk assessment. As the obligor and creditor are from different countries, the credit risk arises both from the obligor’s intentions and financial situation (internal risk factors) and from obligor’s business environment in his country (external risk factors). Internal factors of obligor default involve activity, competence, reaction to environment changes and moral attitudes towards exporter of company’s management and employees. Dishonest intentions, however, cannot be expressed mathematically, therefore this aspect of the risk is not analysed in the article. External factors of international trade credit risk involve economic and political risk. Complex gathering and analysis of information about foreign country political and economic stability (country risk) is time and money intensive. Country risk can be evaluated by means of sovereign credit ratings provided by world-known credit rating agencies. Obligor’s individual failure probability can be evaluated by the use of various failure risk models. Statistical models based on discriminant analysis and “theoretical” failure risk models are received as classical ones. Alternative models, like expert systems, hazard and neural network models are also employed in credit risk analysis. Trade credit risk evaluation is very important for risk-based export pricing. With risk-based pricing customers (obligors) are charged according to the default risk they present.

Buyer's optimal ordering policy and payment policy under supplier credit

This paper tries to incorporate previous studies to develop the buyer's inventory model. That is, we want to investigate the buyer's optimal cycle time and optimal payment time under the supplier's trade credit policy and cash-discount policy. Mathematical models have been derived for obtaining the optimal cycle time and optimal payment time for item under the supplier's trade credit and cash discount so that the annual total relevant cost is minimized. Furthermore, numerical examples are given to illustrate the results developed in this paper and to yield managerial implications.

An EOQ model under supplier trade credit policy depending on the order quantity

In 1985, Goyal considered the retailer's inventory replenishment problem under permissible delay in payments independent of the order quantity and the retailer's unit selling price and the purchasing price per unit were equal. In this paper, the restrictive assumptions of the trade credit independent of the order quantity and the retailer's unit selling price equaled to the purchasing price per unit are relaxed. This paper investigates the retailer's inventory problem under permissible delay in payments dependent of the order quantity and the retailer's unit selling price not necessarily equals to the purchasing price per unit within the economic order quantity (EOQ) framework. Four easy-to-use theorems present solution procedures to locate the optimal cycle time of the annual total relevant cost function. Finally, numerical examples are given to illustrate all theorems obtained in this paper.

Buyer-Supplier Relationships and Trade Credit

We create a database of supplier firms' principal customers from Compustat's Business Information File and examine the impact of principal customers on the provision of trade credit. The supplier firms' accounts receivable scaled by sales decreases in the proportion of sales accounted for by principal customers. This is consistent with the financing advantage or price-discrimination theories of trade credit, but less consistent with theories that view trade credit as a general subsidy to all customers to promote sales, as a guarantee of product quality, or as a manifestation of customer bargaining power. The underlying relationship, however, is non-linear, suggesting that transactions motives also affect trade credit. Long-term principal customers pay more promptly when the suppliers are in financial distress, suggesting the value of durable relationships. Accounts payable are also affected by the proportion of sales to principal customers - which suggests that firms match the maturity structure of their assets and liabilities by letting payables policy be determined, in part, by their receivables. Bigger firms offer more trade credit and also pay more promptly: a proportionate increase in sales and asset size increases accounts receivable more than proportionately, and accounts payable less than proportionately. Both accounts receivable and accounts payable are affected by the supplier firm's inventory, leverage, cash flows and profit margin in a manner that is mainly consistent with the financing advantage, the price-discrimination and the transactions cost theories.

Trade Credit as a Competitiveness Tool; Evidence from Developing Countries

Statistics show that the sale of goods on credit is widespread among firms even when they are financially constrained and thus face relatively high costs in providing trade credit. A possible explanation for this is the use of trade credit as a competitiveness tool. By analyzing both the impact of customer as well as producer market power on a firm’s decision to provide trade credit, we examine whether trade credit is indeed used as a way to lock in customers by firms in developing countries. Using a new dataset containing a large number of firms in 42 developing countries, we find strong evidence that an important driving force behind the decision to provide trade credit is the urge to be competitive. This especially holds for those firms that still have to establish a solid market reputation and for firms located in countries with an underdeveloped banking sector.

Optimal retailer's replenishment policy for the EPQ model under the supplier's trade credit policy

This paper investigates the optimal replenishment policy under conditions of permissible delay in payments within an economic production quantity (EPQ) framework. In 1985, Goyal assumed that: 1. The unit selling price and the unit purchasing price are equal. 2. The replenishment rate is infinite. 3. At the end of the credit period, the account is settled. The retailer starts paying for higher interest charges on the items in stock and returns money of the remaining balance immediately when the items are sold. The main purpose of this paper is to modify Goyal's model to presume that the unit selling price and the unit purchasing price are not necessarily equal to reflect the real-life situations, and assumes the replenishment rate is finite. Furthermore, this paper will propose that at the end of the credit period, the retailer will make a partial payment on total purchasing cost and pay off the remaining balance by loan from the bank. One theorem is obtained to explore the convexity of the total annual relevant cost function. Three theorems are developed to determine the optimal cycle time and the optimal order quantity. Numerical examples are given to illustrate these theorems.

Ethnic Ties and the Provision of Credit: Relationship-Level Evidence from African Firms

Abstract This paper studies the effect of ethnic ties on trade credit provision. Previous work in Africa has found that entrepreneurs of Asian and European descent are more likely to obtain credit from their suppliers. However, since these analyses use firm-level data, one cannot distinguish the effect of community ties from that of unobserved firm quality that is correlated with the owner's ethnic background. Using data on specific supplier relationships of African firms, this paper more directly examines the effect of ethnic ties on trade credit provision. Results from random and fixed-effects models indicate that firms are twice as likely to obtain credit from suppliers from within the owners' ethnic communities as from outsiders, suggestive of a very strong effect of communal ties. However, these ties accounts for only a small proportion (15 percent) of the overall preferential credit access enjoyed by entrepreneurs of non-African descent.

The effect of capital lockup and customer trade credits on the optimal lot size—a confirmation of the EPQ

The classical economic production quantity (EPQ) formula, which is obtained by balancing set-up and carrying costs, is reconsidered in this paper. Since the cost of capital tied up in stocked items is the most important part of the carrying costs, a refined approach considering different components of the capital lockup, i.e. direct labour, material, and set-up costs, is presented. Furthermore, in addition to the intensively discussed supplier trade credit, the hitherto neglected customer trade credit is introduced into the analysis. A comparison of the resulting lot-size formula and the classical one indicates that the ongoing discussion about financial refinements of the EPQ might end up at its starting point given by Harris (Oper. Res. 38 (1990) 947–50), as the classical formula can be transformed into the new one by choosing the crucial carrying cost parameter adequately. Consequently, several alternative approximations for the carrying cost parameter in the EPQ are evaluated. Scope and purpose Typically, lot-size planning takes into consideration only data from the production sector. In doing this, the interdependencies between the production and the financial sector of a firm are neglected. Consequently, a recently emerging discussion intends to overcome the separation of these two firm sectors. We extend the approaches presented up to the present date by modelling capital lockup in a more detailed way considering both the supplier and the customer trade credit as well as the time structure of the capital lockup.

Late Payment and Credit Management in the Small Firm Sector: Some Empirical Evidence

MICHAEL J. PEEL IS W1TH CARDIFF Business School, Wales, AL.Professor Nicholas Wilson is with ILeeds University Business School, England, and Carole Howorth is with Nottingham University Business School, England. Based on the results of a qtuestionnlaire survey, this paper provides some new evidence relating to late payment and credit and working capital m-ianiagenment practices of a sample of 211 small businesses operating in the United Kingdom manufacturing sector. Small firnms are often suppliers of trade credit, despite the difficulties that this often causes them, and there is little empirical evidence on the credit granting decisions of smiall firnms. Theory suggests that firms facing a higher cost of institutional credit (i.e. small firms) are less likely to offer trade credit. Empirical evidence suggests that not only do small firms provide trade credit to their customers but they often finid themselves providing extended trade credit (i.e. are paid after the due dlate( late). It is clear that exten-dedI tu ade ((re(lit plays anl important signallinig' rol(e t'0o smaller- firms wishing to gaini sales anlt establish reputationi. This paper examtillIc. the extent of late payntient 1or stniall suippliers and the cit-t-ent pt acti(es ill tr-ade credit managenmenit. The kex restilts indicate that thei-e was large suppor t amiong respondenits for the cut rrent I JK legislation giving small firms the statuittot J right to initerest orn late payments, xvitlt such legislation being rated tlhe illost popular measuire to reduce late pax'lntelltt and also the highest rated factot- associated wtih improving busilless performance. Inproved credit attd financial management was, however, rated of relatively low import in this respect. In total, 59.5 pet cenit, of respondents stated that late paimet-tt posed an important or very iml1portall-it problem to their- businesses, wvitih 43. 1 pct l cent Oiving a similar resp)ttsi ts c espC of bad debts. 89 per cent indicated that they paid their own suppliers late to a greater or lesser extent. The amount of working capital management undertaken was found to be related to the severity of the problem for individual firms (i.e. necessity was driving action). Responses from the sample firms were found to differ significantly with respect to firm size; larger small firms had a worse late payment problem and consequently had to do more in the way of 'back-end' credit management (i.e. collection, analysis of late payment and debtor days). However, there was barely any support for credit management training among this sub-group. The smaller (micro) firms had a lesser late payment problem and subsequently did less 'back-end' credit management but were more concerned with various aspects of institutional finance. It was posited that the problems faced by small firms are at least partly associated with business size and with the life cycle of the firm.

Relationships and traders in Madagascar

This article documents the role that personal relationships play in economic exchange. Original survey data show that agricultural traders in Madagascar perceive relationships as the most important factor for success in their business. Evidence details the extent to which relationships are used to serve a variety of purposes such as: the circulation of information about prices and market conditions; the provision of trade credit; the prevention and handling of contractual difficulties; the regularity of trade flows; and the mitigation of risk. Of these, the regularity of supply and demand and the sharing of risk appear particularly important. Larger and more prosperous traders are those with quantitatively and qualitatively better relationships. Family plays little role in business beyond assistance at start‐up.

Financing the Micro-Scale Enterprise: Rural Craft Producers in Scotland, 1840–1914

The micro-scale businesses of independent craft producers have received little attention from historians. This article examines the links between the financing and use of capital by these businesses, and the ambiguous social position of the petit bourgeois business owners. A quantitative examination of the relative importance of the various sources of finance for these firms is assessed in the context of the generally accepted picture of financing for British industry, revealing differences in the pattern of funding for micro-scale enterprises. The ambiguous social relationships between the micro-scale business owners and the larger bourgeoisie, and with the working class, are partly explained by the underlying economic relationships. In particular the supply of trade credit by larger firms, and the use of credit and infrequent wage payments in their relationships with the working class, are identified as important elements.

Credit Control — A Survey

The success of a credit system, in terms of both effectiveness and cost, is largely determined by policy established within the company. Too conservative a policy will entail high opportunity cost through loss of business, but too liberal a policy results in the cost of tying up funds in debtors and the increased possibility of bad debts. A survey investigating building merchants' practices in Wales (1984), conducted by questionnaire, reflects some variety in approaching the provision of trade credit, but a relatively high degree of uniformity and lack of sophistication in monitoring systems. Producing statistical indicators of performance from a computer, ceasing to grant credit, or using external services such as credit insurance and factoring, are options which do not seem to have been fully explored.

A Theory of the Ethnically Homogeneous Middleman Group: An Institutional Alternative to Contract Law

A Theory of the Ethnically Homogeneous Middleman Group: An Institutional Alternative to Contract Law

Monetary Policy and the Supply of Trade Credit, 1830-1844

The 1830s were years of instability for the English and Welsh money markets. The tremendous expansion of joint stock banking facilities, the rapid development of the London money market, the monetary crises of 1836-1837 and 1839, and the commercial rivalry among the established private banks, the new banking companies and the Bank of England all created great uncertainty. The problems provoked widespread comment and provided opportunities for government-inspired regulation and reform. Controversy centred on the importance of money in determining fluctuations in the rest of the economy: there was much debate but little consensus.' Nevertheless, government seemed convinced by one group of theorists, the Currency School, and in 1844 took steps to regulate both the note circulation and the formation of banking companies.2 The main purpose of this paper is to examine the nature of the money supply and the consequences for Bank of England policy during the decade or so immediately preceding the implementation of these regulations. The flexibility of particular components of the stock of quasi-money and their relationship to changes in Bank of England3 liabilities are examined. Most attention is directed towards the performance of trade credit, as this played such a prominent role in contemporary economic debate.