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Bank credit, trade credit or no credit: Evidence from the Surveys of Small Business Finances

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  • Cole, Rebel
Abstract
In this study, we use data from the SSBFs to provide new information about the use of credit by small businesses in the U.S. More specifically, we first analyze firms that do and do not use credit; and then analyze why some firms use trade credit while others use bank credit. We find that one in five small firms uses no credit, one in five uses trade credit only, one in five uses bank credit only, and two in five use both bank credit and trade credit. These results are consistent across the three SSBFs we examine—1993, 1998 and 2003. When compared to firms that use credit, we find that firms using no credit are significantly smaller, more profitable, more liquid and of better credit quality; but hold fewer tangible assets. We also find that firms using no credit are more likely to be found in the services industries and in the wholesale and retail-trade industries. In general, these findings are consistent with the pecking-order theory of firm capital structure. Firms that use trade credit are larger, more liquid, of worse credit quality, and less likely to be a firm that primarily provides services. Among firms that use trade credit, the amount used as a percentage of assets is positively related to liquidity and negatively related to credit quality and is lower at firms that primarily provide services. In general, these results are consistent with the financing-advantage theory of trade credit. Firms that use bank credit are larger, less profitable, less liquid and more opaque as measured by firm age, i.e., younger. Among firms that use bank credit, the amount used as a percentage of assets is positively related to firm liquidity and to firm opacity as measured by firm age. Again, these results are generally consistent with the pecking-order theory of capital structure, but with some notable exceptions. We contribute to the literature on the availability of credit in at least two important ways. First, we provide the first rigorous analysis of the differences between small U.S. firms that do and do not use credit. Second, for those small U.S. firms that do participate in the credit markets, we provide new evidence regarding factors that determine their use of trade credit and of bank credit, and whether these two types of credit are substitutes (Meltzer, 1960) or complements (Burkart and Ellingsen, 2004). Our evidence strongly suggests that they are complements.

Suggested Citation

  • Cole, Rebel, 2010. "Bank credit, trade credit or no credit: Evidence from the Surveys of Small Business Finances," MPRA Paper 24689, University Library of Munich, Germany, revised 15 Mar 2010.
    • Handle: RePEc:pra:mprapa:24689
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    References listed on IDEAS

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    2. Bogdan Włodarczyk & Marek Szturo & George H. Ionescu & Daniela Firoiu & Ramona Pirvu & Roxana Badircea, 2018. "The impact of credit availability on small and medium companies," Post-Print hal-01773998, HAL.
    3. Chong, Terence Tai-Leung & Lu, Liping & Ongena, Steven, 2013. "Does banking competition alleviate or worsen credit constraints faced by small- and medium-sized enterprises? Evidence from China," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3412-3424.
    4. Yanko Hristozov, 2020. "Corporate Indebtedness of Non-Financial Corporations in Bulgaria," Economic Alternatives, University of National and World Economy, Sofia, Bulgaria, issue 4, pages 536-566, December.
    5. Galya Taseva-Petkova, 2015. "Trade credit and risk of insolvency," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 4, pages 77-100,101-.
    6. Florian Leon, 2015. "What do we know about the role of bank competition in Africa?," CERDI Working papers halshs-01164864, HAL.
    7. Białek-Jaworska Anna & Krawczyk Tomasz, 2019. "Corporate bonds or bank loans? The choice of funding sources and information disclosure of Polish listed companies," Central European Economic Journal, Sciendo, vol. 6(53), pages 262-285, January.
    8. Galya Taseva, 2019. "Passivity of Creditors among Non-Financial Enterprises in Bulgaria," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 128-159.
    9. repec:bas:econth:y:2012:i:6:p:47-64 is not listed on IDEAS
    10. Ukoha, Igwe. Ikenna & Mejeha, Remy & Nwaru, Jude & Ibeagwa, Okwudili & Maduike, Iifeanyi, 2020. "Explicating the Prevalence of Women Farmers’ Deterrence from Microfinance Banks Loans in South-East Nigeria: A Censored Tobit Regression Model of Analysis," International Journal of Applied Economics, Finance and Accounting, Online Academic Press, vol. 7(2), pages 82-89.
    11. Bogdan Włodarczyk & Marek Szturo & George H. Ionescu & Daniela Firoiu & Ramona Pirvu & Roxana Badircea, 2018. "The impact of credit availability on small and medium companies," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 5(3), pages 565-580, March.
    12. Cole, Rebel, 2011. "How do firms choose legal form of organization?," MPRA Paper 32591, University Library of Munich, Germany.
    13. repec:bas:econth:y:2012:i:6:p:26-46 is not listed on IDEAS
    14. Anna Malinowska, 2016. "The impact of monetary policy and agent heterogeneity on firm financing structure: evidence from the USA," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 46.
    15. Miller, Steph & HOFFER, ADAM & Wille, David, 2016. "Small-Business Financing after the Financial Crisis: Lessons from the Literature," Working Papers 07306, George Mason University, Mercatus Center.
    16. Tsuruta, Daisuke, 2016. "No lending relationships and liquidity management of small businesses during a financial shock," Journal of the Japanese and International Economies, Elsevier, vol. 42(C), pages 31-46.
    17. Robert Pollin & James Heintz, 2013. "Study of U.S. Financial System," FESSUD studies fstudy10, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    18. Prasad Krishnamurthy, 2015. "Banking Deregulation, Local Credit Supply, and Small Business Growth," Journal of Law and Economics, University of Chicago Press, vol. 58(4).
    19. Anna Białek-Jaworska & Natalia Nehrebecka, 2015. "Rola kredytu handlowego w finansowaniu przedsiębiorstw," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 5, pages 33-64.
    20. Anna Białek-Jaworska & Natalia Nehrebecka, 2016. "The role of bank credit in business financing in Poland," Working Papers 2016-03, Faculty of Economic Sciences, University of Warsaw.
    21. Rebel A. Cole & Jason Damm, 2020. "How Did The Financial Crisis Affect Small‐Business Lending In The United States?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 43(4), pages 767-820, December.
    22. Andrea Bellucci & Ilario Favaretto & Germana Giombini, 2014. "Does Innovation Affect Credit Access? New Empirical Evidence from Italian Small Business Lending," IAW Discussion Papers 104, Institut für Angewandte Wirtschaftsforschung (IAW).

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    More about this item

    Keywords

    availability of credit; bank credit; capital structure; entrepreneurship; relationships; small business; SSBF; trade credit;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • J71 - Labor and Demographic Economics - - Labor Discrimination - - - Hiring and Firing
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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