Trade Credit: Suppliers as Debt Collectors and Insurance Providers
Posted: 17 Jul 2008
Date Written: March 2007
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 Classification: G30, M130, D920
Suggested Citation: Suggested Citation