Trade credit and entrepreneurship

As this blog is dedicated to entrepreneurship and as I read the published journals in the subject it seemed reasonable to start reporting on this research and what it means in practical terms for entrepreneurs.  The first article is published in the most recent edition of the International Small Business Journal (Vol. 28; No. 3) by two professors from the University of Murcia in Spain.  It looks at what influences the availability of trade credit and studies over 47,000 small businesses across Europe (Belgium; Finland; France; Greece; Spain; Sweden; UK). 

The paper runs some rather complex models on a large dataset and certainly seems like a robust piece of work.  We all know that trade credit is important for small firms and this research confirms its value as a means of supporting the viability of businesses.  During recessionary periods trade credit, like other forms of credit, can decline and this can negatively impact entrepreneurial businesses that are already struggling.  They show little variation between different European countries in terms of the availability of trade credit, which contradicts findings of other studies.  It shows that firms who have greater access to capital markets are more likely to grant their customers credit.  This means that larger more solvent firms are more likely to be more generous when working with their counterparts.  It seems that access to external financing is often leveraged on behalf of smaller firms by larger firms so as to help them purchase products and services.  Also firms with higher profit margins and firms facing a reduction in sales are more likely to provide trade credit.  Firms also provide more credit to other firms when they appear to offer the potential to grow and hence purchase more goods and services.

What does this mean though for your typical entrepreneur?  Well it appears it would be wise to choose larger suppliers and check out their ability to borrow, as their creditworthiness may impact on the credit terms they are willing to offer you.  It may also suggest that those great credit terms might in fact betray a supplier who is making wonderful profit on what they sell you.  You might even want to bargain on price a little harder and worry a little less about the credit; ultimately those nice credit terms might be costing you.  Finally, if you’re growing, or can at least make the supplier think you are likely to grow, you will ultimately become a more valuable customer and get better credit.  Frankly, if you are growing rapidly your cash flow challenges may well demand those improved terms.  None of this is rocket science but it is nice to have a large well researched study confirming the logic behind some of these issues.

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