Trade credit: Suppliers as debt collectors and insurance providers

Abstract

This article examines how in a context of limited enforceability of contracts suppliers may have a comparative advantage over banks in lending to customers because they are able to stop the supply of intermediate goods. Suppliers may act also as liquidity providers, insuring against liquidity shocks that could endanger the survival of their customer relationships. The relatively high implicit interest rates of trade credit are the result of insurance and default premiums that are amplified whenever suppliers face a relatively high cost of funds. I explore these effects empirically for a panel of UK firms. (JEL: G30, M130, D920). © The Author 2006. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved.