Trade Credit Versus Bank Credit: Which is More Stable in a Recession?

Abstract

Small and large firms alike rely on their suppliers not just for material inputs, but also for lines of credit. This form of financing – called trade credit – has been studied as an alternative source of financing to loans from financial intermediaries (i.e. banks). In this paper, I derive a theoretical framework from existing literature that forms the basis for predicting how the allocation of trade credit and bank loans change in a recession. I conduct statistical analysis using World Bank Development Indicators and the Enterprise Survey, examining firm-level data on Eastern Europe and Central Asia. Ultimately, I find strong evidence that the relationship between economic growth and the use of trade credit is nonlinear. The results of the analysis also suggest that suppliers provide a more stable source of funding than financial intermediaries do.