Trade Credit: Suppliers as Debt Collectors and Insurance Providers

44 Pages Posted: 19 Jul 2003

See all articles by Vicente Cuñat

Vicente Cuñat

London School of Economics & Political Science (LSE) - Financial Markets Group

Date Written: September 4, 2002

Abstract

There are two fundamental puzzles about trade credit: why does it appear to be so expensive, and why do input suppliers engage in the business of lending money? This paper addresses and answers both questions analysing the interaction between the financial and the industrial aspects of the supplier-customer relationship. It examines how, in a context of limited enforceability of contracts, suppliers may have a comparative advantage over banks in lending to their customers because they hold the extra threat of stopping the supply of intermediate goods. Suppliers may also act as liquidity providers, providing insurance against liquidity shocks that may endanger the survival of their customer relationships. The relatively high implicit interest rates of trade credit result from the existence of insurance and default premia. The implications of the model are examined empirically using parametric and nonparametric techniques on a panel of UK firms.

Keywords: Trade Credit, Debt Enforceability, Liquidity

Suggested Citation

Cuñat, Vicente, Trade Credit: Suppliers as Debt Collectors and Insurance Providers (September 4, 2002). EFA 2003 Annual Conference Paper No. 367. Available at SSRN: https://ssrn.com/abstract=423501 or http://dx.doi.org/10.2139/ssrn.423501

Vicente Cuñat (Contact Author)

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom

HOME PAGE: http://www.vicentecunat.com

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