Trade credit is an important source of funding for some businesses, particularly those in the unlisted business sector. Nonetheless, little is known about the use of trade credit owing to the paucity of data.

The Reserve Bank of Australia published and article which explores the use of trade credit, as well as the terms and conditions of trade credit contracts. It also examines the relationship between trade and bank credit. Understanding the nature of this relationship provides useful insights into how changes in financial conditions will affect the overall funding of businesses.

Summary Conclusion:  Trade credit is an important source of funding for businesses in Australia, particularly in the unlisted sector. Although most unlisted businesses use trade credit to some degree, the extent of its use is influenced by both the nature and size of businesses. Industries that carry extensive inventories and are providers of intermediate goods tend to use and supply more trade credit. Likewise, large unlisted businesses typically have a higher proportion of trade credit to total assets than smaller unlisted businesses, possibly because the latter tend to have weaker bargaining power and are perceived to be riskier than larger businesses. Businesses generally appear to be consistently repaying trade credit well beyond the due date, suggesting that trade creditors tend not to enforce late payment penalties against their trading partners. While it is possible that trade credit can be either a substitute or complement to bank credit, the estimates presented in this article suggest that trade and bank credit are partial substitutes for the typical Australian unlisted business. This means that changes to the cost or availability of bank credit will have somewhat less effect on a business’ overall debt funding than would be the case if trade and bank credit were complements.

Source:  Study Conducted by the Reserve Bank of Australia  –  to read the full story click on this link: bu-0913-5

Published in September 2013