The Legal Cost of Trade Credit
26 Pages Posted: 13 Mar 2008
Date Written: March 12, 2008
According to currently available evidence, the recourse to trade credit in Italy is more important than (in order) in Spain, France and Germany, and above all Northern European countries, where the shortest delays of payment are recorded. The objective of this paper is to estimate whether the different degrees of recourse to trade credit is also influenced by the characteristics of the national legal systems. To this end, this paper compares Italy with countries representative of different European legal families: Sweden, Germany, United Kingdom and France. Trade creditors usually make recourse to informal guarantees based on self-defence mechanisms and on conditional sale contracts. These measures are largely independent of enforcement and bankruptcy procedures, whose effectiveness varies largely across countries, and on which banks usually rely. The consequence is that in relative terms trade credit is cheaper in countries where banks bear the burden of less efficient enforcement and bankruptcy procedures. The conclusion is that since in Italy the cost of bank credit recovery is higher than in other European countries where enforcement and bankruptcy procedures are more efficient, this contributes to explain why in Italy there is higher recourse to trade credit.
Keywords: Trade Credit, Comparative Bankruptcy, Company Law
JEL Classification: K2, G3, G33
Suggested Citation: Suggested Citation