A Note on the Price of Trade Credit
Managerial Finance, Vol. 37, No. 6, pp. 565-574, 2011
Posted: 25 Jul 2010 Last revised: 16 Nov 2011
Date Written: October 14, 2010
In contrast to common literature that suggests that trade credit is an extremely expensive source of financing with annual interest rates exceeding 40 percent, this paper argues that the average interest rate of trade credit does not exceed the cost of alternative funds, with estimated average interest rates of 4 to 6 percent, thereby explaining why trade credit constitutes a substantial part of the optimal financing mix also of large, liquid, and capital market listed firms.
Keywords: Trade Credit, Short-Term Financing, Days Payable Outstanding
JEL Classification: G30, G32, G39
Suggested Citation: Suggested Citation