Trade credit, a substitute for traditional funding?

Following the financial crisis of 2008, many central banks, including the ECB, have implemented a program of quantitative easing.

Quantitative easing is an instrument used by central banks to stimulate the economy in times when conventional monetary policy is inadequate.  With this policy, interest rates are lowered, making it easier for companies and consumers to obtain loans. One would assume that, since financing has become cheaper and more accessible, companies will turn to banks instead of other sources of financing.

Would this mean that the use of trade credit is diminished? Unfortunately, the answer to this question is a bit more complicated than a simple yes or no, but will be widely discussed in our paper. For now we’ll just explain from which hypothesis we start.

Research has shown that firms with difficult access to financial markets tend to obtain more trade credit from their suppliers, but do not extend more credit to their customers (Bastos & Pindado, 2013). In the opposite case, one would assume that companies with easy access to funding would extend trade credit more easily and might or might not make use of trade credit given by their suppliers.

One can also think that, because of the subprime financial crisis, companies have lost (and still not recovered) faith in conventional funding through financial markets. This would then mean that trade credit and other ways of funding have become more common than before. As you have probably read in our previous post, this is not the case for Flemish companies, but what about their use of trade credit?