Trade Credit Versus Bank Credit: Which is More Stable in a Recession?
Haverford College. Department of Economics
Place of Publication
Table of Contents
Haverford users only
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.