What You Sell Is What You Lend? Explaining Trade Credit Contracts.∗

Financial trade credit theories argue that suppliers have an advantage over other lenders in financing credit-constrained firms. While the reasons for this advantage differ across theories, they are usually related either to product characteristics or to market structure. We exploit this insight to analyze trade credit volume and contract terms. Ceteris paribus, service suppliers offer as much trade credit as suppliers of differentiated goods and significantly more than suppliers of standardized products. Moreover, service suppliers provide weaker incentives for early repayment than suppliers of standardized and differentiated products. Since services have no collateral value, but are difficult to divert, these findings suggest that the most important product characteristic for explaining trade credit contracts is the ease with which the input can be diverted. We also find that market power in input and output markets contributes to explain trade credit patterns. JEL classification: G32.