Determinants of Trade Credit Use by Small and Medium-Sized Enterprises in Canada

Working Paper

Vincent Chandler, Small Business Branch, Industry Canada

December 2009

Table of Contents

• I. Introduction
• II. Theory and previous evidence
• III. Data and Previous Evidence
• IV. Methodology
• V. Results
  • A) Trade Credit Demand
  • B) Trade Credit Approval
  • C) Importance of Trade Credit in Daily Business
• Conclusion
• Bibliography

Acknowledgements

The author wishes to thank Jennifer Hunt, Frédéric Laurin, Bogdan Buduru, Denis Martel, Gregor Schwerhoff and Richard Archambault for helpful comments.

Abstract

This paper investigates the determinants of trade credit demand, approval and importance for Canadian small and medium-sized enterprises (SMEs) using firm-level data originating from the Small and Medium-Sized Enterprise Financing Data Initiative 2004. The findings show that firms which experience financing difficulties seek relatively more trade credit. However, these firms receive less trade credit than those that do not report such difficulties and do not rely significantly more on trade credit than on lines of credit. Furthermore, there is evidence that product quality risk plays an important role on the trade credit market. Finally, it seems that bigger SMEs tend to use their asymmetric bargaining position to seek more trade credit.

JEL Classification: G32