Determinants of Trade Credits in China: An Empirical Investigation

Abstract

In their daily operations firms frequently make use of trade credits. Through the use of trade credits, firms can respond to short-term transaction needs: for buyers (customers), short-term financing allows them to choose the optimal inputs for their production which can contribute to subsequent product sales, and for sellers (suppliers), allowing for late payments provides a way of selling products to temporarily cash-constrained buyers. Given the short-term nature of such credits and the existence of collateral in the form of stocked products, sellers frequently offer trade credits. These allow for a richer combination of trade patterns, thereby enhancing efficiency in trade. If such credits are in the form of sellers accepting IOUs (or bills) from buyers, then such bills are typically underwritten by banks who supply transaction services to firms with deposit accounts. Sellers do not have to assume default risks, and such a transfer of risk makes sound economic sense because banks have more information on buyers through the transaction records on their accounts. Banks also have the advantage that they can thereafter withhold the long-term financing needed for undertaking fixed investment if firms fail to repay their trade credits.