A Note on the Price of Trade Credit
Astrid K. Chludek
University of Cologne - Cologne Graduate School in Management, Economics and Social Sciences
October 14, 2010
Managerial Finance, Vol. 37, No. 6, pp. 565-574, 2011
In contrast to common literature that suggests that trade credit is an extremely expensive source of financing with annual interest rates exceeding 40 percent, this paper argues that the average interest rate of trade credit does not exceed the cost of alternative funds, with estimated average interest rates of 4 to 6 percent, thereby explaining why trade credit constitutes a substantial part of the optimal financing mix also of large, liquid, and capital market listed firms.
Keywords: Trade Credit, Short-Term Financing, Days Payable Outstanding
JEL Classification: G30, G32, G39
Date posted: July 25, 2010 ; Last revised: November 16, 2011
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