The Supply of Trade Credits: Evidence from the UK

Abstract

The extension of trade credit is considered to be a form of short term financing that many firms use from both the supply and demand sides. This paper focuses on testing the theoretical determinants on trade credit and examines whether 1) creditworthy firms that have access to both external and internal financing, 2) they experience growth in profits and sales, and 3) price discrimination can actually motivated the extension of trade credit. The paper uses a large sample of data from the UK. We identify whether the decision to offer trade credit as measured by the level of account receivables depends, on firm's size. We draw a distinction between small, medium and large firms, and find evidence that the decision to extend trade credit and the relationship to the firm's ability to access finance, intermediate, or price discriminate can to a large extent be determined by the size of the firm.