Bank Credit, Trade Credit or No Credit: Evidence from the Surveys of Small Business Finances

49 Pages Posted: 23 Jan 2010 Last revised: 25 Aug 2018

Date Written: July 31, 2018


In this study, we use data from the SSBFs to provide new information about the use of credit by small businesses in the U.S. More specifically, we first analyze firms that do and do not use credit; and then analyze why some firms use trade credit while others use bank credit. We find that one in five small firms uses no credit, one in five uses trade credit only, one five uses bank credit only, and two in five use both bank credit and trade credit. These results are consistent across the three SSBFs we examine – 1993, 1998 and 2003.

When compared to firms that use credit, we find that use no credit firms are significantly smaller, more profitable, more liquid and of better credit quality, but hold fewer tangible assets. We also find that firms using no credit firms are more likely to be found in the services industries and in the wholesale and retail-trade industries. In general, these findings are consistent with the pecking-order theory of firm capital structure.

Firms that use trade credit firms are larger, more liquid, of worse credit quality, and less likely to be a firm that primarily provides services. Among firms that use trade credit, the amount used as a percentage of assets is positively related to liquidity and negatively related to credit quality and is lower at firms that primarily provide services. In general, these results are consistent with the financing-advantage theory of trade credit.

Firms that use bank credit are larger, less profitable, less liquid and more opaque as measured by firm age, i.e., younger. Among firms that use bank credit firms, the amount used as a percentage of assets is positively related firm liquidity and to firm opacity as measured by firm age. Again, these results are generally consistent with the pecking-order theory of capital structure, but with some notable exceptions.

We contribute to the literature on the availability of credit in at least two important ways. First, we provide the first rigorous analysis of the differences in these firms and other small U.S. firms that do use credit. Second, for those small U.S. firms that do participate in the credit markets, we provide new evidence regarding factors that determine their use of and trade credit and of bank credit, and whether these two types of credit are substitutes (Meltzer, 1960) or complements (Burkart and Ellingsen, 2004). Our evidence strongly suggests that they are complements.

Keywords: availability of credit, bank credit, capital structure, entrepreneurship, relationships, small business, SSBF, trade credit

JEL Classification: G21, G32, J71, L11, M13

Suggested Citation

Cole, Rebel A., Bank Credit, Trade Credit or No Credit: Evidence from the Surveys of Small Business Finances (July 31, 2018). Available at SSRN: or

Rebel A. Cole (Contact Author)

Florida Atlantic University ( email )

College of Business
777 Glades Road
Boca Raton, FL 33431
United States
1-561-297-4969 (Phone)


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