The Relationship between Trade Credit and Loans: Evidence from Small Businesses in Japan

Posted: 10 Jun 2008

See all articles by Iichiro Uesugi

Iichiro Uesugi

Hitotsubashi University

Guy Yamashiro

California State University, Long Beach - Department of Economics

Abstract

Much of the existing literature on the relationship between trade credit and loans focuses solely on how a reduction in loans affects the use of trade credit. In this paper, we additionally investigate if a reduction in trade credit is offset by an increase in loans. Using a unique firm-level dataset of small Japanese businesses, we find the following: (1) as the lending attitude of financial institutions worsens, firms significantly decrease their use of trade credit, and (2) a reduction in trade credit, due to a decline in sales, leads to a reduction in the amount of loans extended. Our results provide evidence that small firms in Japan view trade credit and loans as complementary debt instruments. The primary implication of these findings is that bank-dependent small businesses may find their financing severely constrained in the event of major adverse shocks to real or financial activity.

Keywords: Trade credit; Bank loans; Financial frictions

JEL Classification: E14, G15

Suggested Citation

Uesugi, Iichiro and Yamashiro, Guy, The Relationship between Trade Credit and Loans: Evidence from Small Businesses in Japan. International Journal of Business, Vol. 13, No. 2, 2008, Available at SSRN: https://ssrn.com/abstract=1141326

Iichiro Uesugi (Contact Author)

Hitotsubashi University ( email )

2-1 Naka Kunitachi-shi
Tokyo 186-8306
Japan
+81-42-580-8348 (Phone)

Guy Yamashiro

California State University, Long Beach - Department of Economics ( email )

1250 Bellflower Blvd
Long Beach, CA 90840-4607
United States

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