Trade Credits and Accounts Payables

Abstract

The demand for trade credit is considered to be a form of short-term financing that many firms use in order to postpone immediate cash payment, which normally results in improving cash flow. This paper focuses on testing the theoretical determinants on trade credit from the demand side examining whether: 1) - creditworthy firms that have access to both external and internal financing demand trade credits, 2) - that those firms experiencing growth in profits and sales demand trade credit, and 3) - price discrimination by firms can actually influence the demand for trade credit. We use a large sample of 13,193 companies from the UK, and identify whether the decision to demand trade credit as measured by the level of accounts payable depend, on firm's size, or the type of sector in which firms operate in. We draw a distinction between small, medium and large firms, and find evidence that the decision to demand trade credit and the relationship to firm's ability to access finance, their profit and growth, or price discriminate can to a large extent be determined by the size of the firm. When the models are applied to cross sectors, it is evident that firms in the wholesale and retail sectors tend to have significant relationships.