Crafty Credit? The Strategic Use of Trade Credit

Abstract

This paper explores the contribution that trade credit can and does make as a competitive device that can add value to companies when used strategically. By reference to the literature, we argue that trade credit is not merely a short-term collection issue, and that, used proactively, it can be a source of competitive advantage. We then develop an empirical model to test the relationship between trade credit and sales/profitability to determine whether, and the extent to which, trade credit constitutes a strategic tool. We find, inter alia, evidence that, when used strategically to enhance competitive advantage, firms have a discernible optimal level of trade credit. Despite data limitations, we conclude that our model demonstrates a viable methodology that could be applied usefully to an extended data set.