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date: 05 March 2021

Abstract and Keywords

Recent research has found evidence of the central role of trade credit in the financing of small businesses. In the United States, for example, trade credit is used by about 60 percent of small businesses; such a large incidence of use is not observed in any other financial service except checking accounts. This article analyzes several aspects of the trade credit agreement. It starts by explaining why trade credit is such an extended phenomenon in spite of the existence of a specialized financial sector. Then it discusses several aspects that make trade credit a unique and not fully contractual arrangement, whose value depends to a great extent on the value of the commercial relationship between the supplier and the buyer. It then focuses on the value of trade credit for entrepreneurial firms.

Keywords: trade credit, small businesses, entrepreneurial finance, contractual arrangement, commercial relationship, entrepreneurial firms

Vicente Cuñat

Vicente Cuñat is an associate professor of finance at the London School of Economics. He graduated from the University of Valencia, and holds an MSc from CEMFI and a PhD in economics from the London School of Economics. His research focuses on theoretical and empirical issues on corporate finance that are often linked to questions in industrial organization or labor economics. He has published in the American Economic Review and the Journal of Finance, among other journals.

Emilia García-Appendini

Emilia García-Appendini is assistant professor of finance at Bocconi University. She holds an undergraduate degree in applied mathematics from the Instituto Tecnológico Autónomo de México, and an MSc and a PhD in economics and finance from Universitat Pompeu Fabra, Spain. Her research has focused on the financing of small firms, with particular emphasis on the role of trade credit.

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