An Investigation into the Determinants of Trade Credit Use by French Small and Medium Enterprises

The aim of this paper is to analyse the role of trade credit in the financing of French small and medium-sized enterprises (SMEs) using specific data collected in a recent survey on small firms. We provide direct evidence that inter-firm credit offered by SMEs is sensitive to the strategic importance of firm size and position. Using existing theories, we also test a supply function and a model of demand for trade credit. On the one hand, results validate supply-side theories relative to a reduction of asymmetric information between the buyer and the seller. On the other hand, econometric exercises show that both a transaction motive, linked to efficient cash management, and a financing motive are significant determinant of trade credit demand. According the financing motive, trade credit is specifically used for the purpose of short-term financing by firms exposed to information asymmetries and bank credit rationing.