An economic model of trade credit
Abstract
In considering trade credit, we need to ask three questions:1. Why do nonfinancial firms commonly participate in the process of financial intermediation by extending credit to their customers?2. What explains differences in credit periods between firms and industries as well as over time for specific firms and industries?3. How do changing monetary conditions affect the credit that firms extend to their customers?To answer these questions, we first identify two reasons for credit sales: the first we might call a financing motive, and the second a transactions motive. The transactions motive can readily be understood—it costs something to match the time pattern of payment for goods with the time pattern of receipt of goods. Buyers benefit if bills are allowed to accumulate for periodic payment. Furthermore, trade credit gives buyers time to plan for the payment of unexpected purchases, enables them to forecast future cash outlays with greater certainty, and simplifies their cash management. To the extent that buyers benefit, sellers have an opportunity to sell credit. It is likely that, to a large extent, the aggregate stock of trade credit is explained by the transactions motive.
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According to Schwartz (1974), the Financing Advantage Theory postulates that managers who have a financial advantage develop an efficient receivables management strategy.
“According to Schwartz (1974), the Financing Advantage Theory postulates that managers who have a financial advantage develop an efficient receivables management strategy.”
From The Effects of Working Capital Management on the Financial Performance of Commercial and Service Firms Listed on the Nairobi Securities Exchange in Kenya (2024) · cites this paper as Schwartz (1974)
Cites
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Does Working Capital Management Affect Profitability of Belgian Firms?
Deloof, M. (2003) · Journal of Business Finance & Accounting · doi:10.1111/1468-5957.00008 · Cited by 1,849 · see citing works
A transactions theory of trade credit use
Ferris, J. S. (1981) · The Quarterly Journal of Economics · doi:10.2307/1882390 · Cited by 603 · see citing works
Wanzala, R. W., & Obokoh, L. (2024) · Risks · doi:10.3390/risks12080119 · Cited by 8 · see citing works
“According to Schwartz (1974), the Financing Advantage Theory postulates that managers who have a financial advantage develop an efficient receivables management strategy.”
Background
- Authors
- Schwartz, R. A.
- Corresponding author
- Schwartz, Robert A.
- Venue
- The Journal of Financial and Quantitative Analysis
- Publisher
- JSTOR
- Published
- 1974-09
- Volume
- 9
- Issue
- 4
- Pages
- 643
- ISSN
- 0022-1090 (ISSN-L)
- OpenAlex
- W2081008536
- Cited by
- 612
- References
- 15
- Citations by year
- 2026: 19 · 2025: 40 · 2024: 33 · 2023: 36 · 2022: 25 · 2021: 34 · 2020: 37 · 2019: 30 · 2018: 39 · 2017: 34 · 2016: 24 · 2015: 31 · 2014: 23 · 2013: 20 · 2012: 19
- FWCI
- 5.22
- Type
- journal article
- Language
- en
- Open access
- closed
- Locations
- Journal of Financial and Quantitative Analysis (publishedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Topics
- Social Sciences › Business, Management and Accounting › Accounting › Working Capital and Financial Performance
- Social Sciences › Economics, Econometrics and Finance › Finance › Banking stability, regulation, efficiency
- Social Sciences › Business, Management and Accounting › Accounting › Corporate Finance and Governance
- Keywords
- trade credit, credit period, financial intermediation, non-financial firms, financing motives, monetary conditions, cash management, credit sales
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