Trade Credit in Times of Crisis: Evidence from European SMEs

AbstractPurpose – The purpose of this paper is to investigate the use of trade credit in a sample of small and mediumenterprises in Europe, before and after the outbreak of the subprime financial crisis and the sovereign debtcrisis (2006-2013). This study aims to verify whether trade credit is an alternative source of funding comparedto other sources of financing. In addition, it tests whether firms that grant extended payment terms to theircustomers demand delayed accounts payable terms from their suppliers.Design/methodology/approach – The empirical analysis is conducted on a sample of EuropeanSMEs that were observed over the period immediately before and after the outbreak of the subprime crisis(2008) and the sovereign debt crisis (2010-2011). A panel data analysis is conducted using the generalizedmethod of moment.Findings – The results suggest that SMEs with a high probability of insolvency use trade credit moreextensively. Distressed and weaker SMEs are less able to match accounts receivable to accounts payable.Finally, the evidence suggests that during the financial crises, the substitution hypothesis is weakened andliquidity shocks are propagated through trade credit channels.Originality/value – This study contributes to the extant literature as very few studies have analyzedintercompany financing for European SMEs during periods of financial crisis. The results suggest thatsupporting trade credit channels, through timely injections of liquidity to companies, could reduce the impactof both financial and intercompany credit crunch on SMEs.