The Lender's Lender: Trade Credit and the Monitoring Role of Banks

56 Pages Posted: 8 Sep 2018 Last revised: 28 May 2024

See all articles by Kayla Freeman

Kayla Freeman

University of Georgia, Terry College of Business, Department of Finance

Date Written: November 22, 2022

Abstract

A firm's role as lender to its customers (through the extension of trade credit) may be influenced by the firm's own lenders. Linking a novel dataset of trade credit between firms and their major customers to firm loan data, I find evidence that lenders influence firms to limit credit concentrations with major customers that appear to otherwise have significant vertical bargaining power. Firms with major lending relationships extend proportionally less trade credit to customers comprising a larger percentage of their sales, consistent with credit concentration avoidance, and instead extend more trade credit to minor customers. Credit concentration avoidance is more pronounced when the lender has experienced more recent portfolio defaults and when the firm's customers are riskier in terms of either default risk or long payable periods. Analysis of hand-collected loan contract
details reveals receivable concentration limits in borrowing base formulas as one
channel through which banks exert influence over trade credit policy.

Keywords: Trade Credit, Supply Chain, Credit Risk, Bank Lending

JEL Classification: D22, D23, G32, L14

Suggested Citation

Freeman, Kayla, The Lender's Lender: Trade Credit and the Monitoring Role of Banks (November 22, 2022). Available at SSRN: https://ssrn.com/abstract=3235838 or http://dx.doi.org/10.2139/ssrn.3235838

Kayla Freeman (Contact Author)

University of Georgia, Terry College of Business, Department of Finance ( email )

Brooks Hall
Athens, GA 30602-6254
United States

HOME PAGE: http://https://sites.google.com/site/kaylafreemanfinance/home

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