Title

The Trade Credit Decision: Evidence of UK Firms

Publication Type

Journal Article

Publication Date

9-2003

Abstract

Trade credit finance and credit management are gradually gaining the research attention an area of such importance merits. One area, still far from resolved, is why trade credit is extended by non-financial firms to customers. This paper seeks to identify the generic forces behind the trade credit offer and to explore the empirical support for 20 propositions on credit motives derived from the literature and the implications of such motives to credit policies.The paper reports findings from a survey of senior finance officers involved in credit management in large UK companies. It assesses the degree to which theoretical explanations for granting trade credit are experienced in practice and whether observed differences attaching to credit motives among firms are associated with variations in credit policies and debtor days.The study found strong empirical support for seven propositions linked to competitiveness, pricing, investment and financing, and weaker support for a number of other theoretically- derived motives for trade credit extension. Factor analysis suggested a more insightful approach to classifying trade credit motives, covering investment in customers, customer’s operating and financial benefits, supplier’s marketing/operational benefits and market pressure to conform. In addition, two factors - customer relations and pricing flexibility - were extracted as motives for varying credit terms. Consistent with our hypothesis average debtor days were found to be significantly higher for those firms emphasising the financing, investment, and pricing flexibility propositions. These findings, and implications for future research, are explored.

Keywords

Trade Credit, Credit Motives, Investment in Customers, Financial Benefits, Marketing Benefits, Customer Relations, Pricing Flexibility

Discipline

Finance and Financial Management

Research Areas

Accounting Information System

Publication

Managerial and Decision Economics

Volume

24

Issue

6-7

First Page

419

Last Page

438

ISSN

0143-6570

Identifier

10.1002/mde.1049

Publisher

Wiley: 24 months

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