PurposeThis study examines the impact of trade credit as a funding source on profitability among small and medium-sized enterprises (SMEs).Design/methodology/approachA large cross-sectional panel dataset covering 15,897 Swedish SMEs in five industry sectors from 2009 to 2012 was analysed using several statistical techniques.FindingsThe study provides empirical evidence that the use of trade credit significantly and negatively affects firm profitability, indicating that SMEs with lower accounts payable are more profitable. Furthermore, liquidity level and firm size are positively related to profitability, while firm age is negatively related to profitability.Practical implicationsIf firms rely, or are forced to rely, too heavily on accounts payable as a funding source, their long-term profitability could be jeopardized. An efficient financing policy should make the costs related to the use of trade credit more transparent.Thus, firm managers could explicitly use trade credit agreements with their suppliers to control the costs related to this particular financial source.Originality/valueTo the authors’ knowledge, this study is the first to focus on the impact of trade credit on profitability in the Swedish context, where SMEs are encouraged to use trade credit as a funding source. In addition, the study is based on an extensive sample of SMEs across several industry sectors.
Journal of Advances in Management Research – Emerald Publishing
Published: Aug 1, 2016