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Small Business Economics

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01.03.2014

Trade credit and SME profitability

verfasst von: Cristina Martínez-Sola, Pedro J. García-Teruel, Pedro Martínez-Solano

Erschienen in: Small Business Economics | Ausgabe 3/2014

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Abstract

Financial literature discusses the motives for trade credit provision by suppliers in depth. However, there is no empirical evidence of the effect of granting trade credit on the profitability of small and medium-sized firms. We examine the profitability implications of providing financing to customers for a sample of 11,337 Spanish manufacturing SMEs during the 2000–2007 period. This article also examines the differences in the profitability of trade credit according to financial, operational, and commercial motives. The findings suggest that managers can improve firm profitability by increasing their investment in receivables and that the effect is greater for financially unconstrained firms (larger and more liquid firms), for firms with volatile demand, and for firms with bigger market shares.

Vorheriger Artikel Regulatory costs on entrepreneurship and establishment employment size

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In trade credit arrangements it is very common to offer early payment discount to the customer. The most common payment term is 2/10, net 30 (Ng et al. 1999), by which a customer takes a 2 % discount on the purchase price if the payment is made within 10 days; otherwise, the payment is in full within 30 days. This translates into an over 40 % annual rate.

GDP growth rate was extracted from Eurostat.

NACE is the European classification of economic activities. NACE is a classification derived from the ISIC (International Standard Industrial Classification) to enable international comparability.

We perform the Hausman (1978) test; if the null hypothesis is rejected, only within-group estimation is consistent; if accepted, random-effects estimation is the best option, since not only is it consistent, it is also more efficient than the within-group estimator.

The investment in trade credit may be influenced by the firm's profitability, and the positive relationship between trade credit and return on assets could be explained if more profitable firms grant more trade credit to their customers because of their greater financial capacity.

We also test for the existence of a non-linear relationship between trade credit and profitability including variable REC² in the regression. Results reject this hypothesis and confirm a linear relationship.

The results do not change if we eliminate control variable SIZE from the estimations.

Additionally, we analyse the effect of inventories on the profitability of receivables. In line with Bougheas et al. (2009) and Daripa and Nilsen (2005), we find that the profitability of receivables is higher for lower inventory firms.

The relation receivables-profitability does not change if we include control variables squared. Moreover, in general, the relation between ROA and control variables does not change either.

However, when time dummies are excluded we find a positive association between GDP growth and firm profitability for OLS and FE estimations. When economic conditions are good, i.e. high GDP growth, firms will enjoy a higher profitability.

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Titel: Trade credit and SME profitability
verfasst von: Cristina Martínez-Sola
Pedro J. García-Teruel
Pedro Martínez-Solano
Publikationsdatum: 01.03.2014
Verlag: Springer US
Erschienen in: Small Business Economics / Ausgabe 3/2014
Print ISSN: 0921-898X
Elektronische ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-013-9491-y

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