Cole, Rebel (2010): Bank credit, trade credit or no credit: Evidence from the Surveys of Small Business Finances.
Download (233kB) | Preview
In this study, we use data from the SSBFs to provide new information about the use of credit by small businesses in the U.S. More specifically, we first analyze firms that do and do not use credit; and then analyze why some firms use trade credit while others use bank credit. We find that one in five small firms uses no credit, one in five uses trade credit only, one in five uses bank credit only, and two in five use both bank credit and trade credit. These results are consistent across the three SSBFs we examine—1993, 1998 and 2003. When compared to firms that use credit, we find that firms using no credit are significantly smaller, more profitable, more liquid and of better credit quality; but hold fewer tangible assets. We also find that firms using no credit are more likely to be found in the services industries and in the wholesale and retail-trade industries. In general, these findings are consistent with the pecking-order theory of firm capital structure. Firms that use trade credit are larger, more liquid, of worse credit quality, and less likely to be a firm that primarily provides services. Among firms that use trade credit, the amount used as a percentage of assets is positively related to liquidity and negatively related to credit quality and is lower at firms that primarily provide services. In general, these results are consistent with the financing-advantage theory of trade credit. Firms that use bank credit are larger, less profitable, less liquid and more opaque as measured by firm age, i.e., younger. Among firms that use bank credit, the amount used as a percentage of assets is positively related to firm liquidity and to firm opacity as measured by firm age. Again, these results are generally consistent with the pecking-order theory of capital structure, but with some notable exceptions. We contribute to the literature on the availability of credit in at least two important ways. First, we provide the first rigorous analysis of the differences between small U.S. firms that do and do not use credit. Second, for those small U.S. firms that do participate in the credit markets, we provide new evidence regarding factors that determine their use of trade credit and of bank credit, and whether these two types of credit are substitutes (Meltzer, 1960) or complements (Burkart and Ellingsen, 2004). Our evidence strongly suggests that they are complements.
|Item Type:||MPRA Paper|
|Original Title:||Bank credit, trade credit or no credit: Evidence from the Surveys of Small Business Finances|
|Keywords:||availability of credit; bank credit; capital structure; entrepreneurship; relationships; small business; SSBF; trade credit|
|Subjects:||L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms
J - Labor and Demographic Economics > J7 - Labor Discrimination > J71 - Discrimination
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill
M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M1 - Business Administration > M13 - New Firms ; Startups
G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages
|Depositing User:||Prof. Rebel Cole|
|Date Deposited:||30. Aug 2010 08:28|
|Last Modified:||14. Feb 2013 12:33|
Aghion, P. and Howitt, P. 1988. Endogenous Growth Theory. Massachusetts Institute of Technology Press. Cambridge, MA.
Ang, J., Cole, R., Lin, J. 2000. Agency costs and ownership structure. The Journal of Finance 55, 81-106
Berger, A. and Udell, G. 1995. Relationship lending and lines of credit in small firm finance. Journal of Business 68, 351-381.
Berger, A., and Udell, G. 1998. The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle, Journal of Banking & Finance 22 (6–8), 613–673.
Berger, A., and Udell, G. 2006. A more complete framework for SME finance, Journal of Banking & Finance 30(11), 2945-2966.
Berger, A., Frame, S., and Miller, N. 2005. Credit scoring and the availability, price and risk of small business credit. Journal of Money, Credit and Banking 37(2), 191-222.
Berger, A., Miller, N., Rajan, R., Stein, J., and Petersen, M. 2005. Does function follow organizational form? Evidence from the lending practices of large and small banks." Journal of Financial Economics 76 (2): 237-269.
Biais, B, and Gollier, C. 1997. Trade credit and credit rationing. Review of Financial Studies 10, 903-937.
Bitler, M., Robb, A., and Wolken, J. 2001. Financial Services Used by Small Businesses: Evidence from the 1998 Survey of Small Business Finances. Federal Reserve Bulletin 87 (April), 183-205.
Blanchflower, D., Levine, P., and Zimmerman, D. 2003. Discrimination in the small business credit narket. Review of Economics and Statistics 84 (4), 930-943.
Burkart, M., Ellingsen, T. 2004. In-kind finance: A theory of trade credit. American Economic Review 94(3), 569-590.
Carey, M., Post, M., and Sharpe, S. Does corporate lending by banks and finance companies differ? Evidence on specialization in private debt contracting. Journal of Finance, 53 (1998), 845-878.
Cavalluzzo, K., and Cavalluzzo, L. 1998. Market structure and discrimination: The case of small businesses. Journal of Money, Credit and Banking 30 (4), 771-92.
Cavalluzzo, K., Cavalluzzo, L., and Wolken, J. 2002. Competition, small business financing, and discrimination: Evidence From a new survey. Journal of Business 75(4), 641-679.
Cavalluzzo, K., and Wolken, J. 2005. Small business loan turndowns, personal wealth and discrimination. Journal of Business 78(6): 2153-2178.
Chakraborty, A., and Hu, C. 2006. Lending relationships in line-of-credit and non-line-of- credit loans: Evidence from collateral use in small business. Journal of Financial Intermediation. 15 (1), 86-107.
Chakravarty, A. Yilmazer, T. 2009. A multi-stage model of loans and the role of relationships. Financial Management, 38(4), 781-816.
Claessens, S., Djankov, S., and Lang, L. 2000. The separation of ownership and control in east asian corporations. Journal of Finance 58, 81-112.
Cole, R. 1998. The importance of relationships to the availability of credit. Journal of Banking and Finance 22, 959-997.
Cole, R. 2008. What do we know about the capital structure of privately held firms? Evidence from the Surveys of Small Business Finance. U.S. Small Business Administration Economic Research Study No. 324. Available at http://www.sba.gov/advo/research/rs324.pdf
Cole, R. 2009. Who needs credit and who gets credit? Evidence from the Surveys of Small Business Finance. U.S. Small Business Administration Economic Research Study. Available at http://www.sba.gov/advo/research/09finfocus.pdf.
Cole, R., Goldberg, L. and White, L. 2004. Cookie-cutter versus character: The micro structure of small-business lending by large and small banks. Journal of Financial and Quantitative Analysis 39, 227-251.
Cole, R., Wolken, J., 1995. Financial services used by small businesses: Evidence from the 1993 National Survey of Small Business Finances. Federal Reserve Bulletin 81 (July), 630-67.
Coleman, S. 2002. The borrowing experience of black and Hispanic-owned small firms: Evidence from the 1998 Survey of Small Business Finances. The Academy of Entrepreneurship Journal 8 (1), 1-20.
Cuñat, V. 2007. Trade Credit: Suppliers as Debt Collectors and Insurance Providers. Review of Financial Studies 20, 492-527.
Elliehausen, G., Wolken, J. 1990. Banking markets and the use of financial services by small and medium-sized businesses. Federal Reserve Bulletin 76 (October), 801-817.
Ferris, J. 1981. A transaction theory of trade credit use. Quarterly Journal of Economics 94(2), 243-270.
Fisman, R. and Love, I. Trade credit, financial intermediation and industry growth. Journal of Finance 58, 353-374.
Frank, M. and and Goyal, V. 2007. Capital structure decisions: What factors are reliably important? working paper.
Greene, W. 2003. Econometric Analysis, 5th Ed. Upper Saddle River, Prentice Hall.
Heckman, J. 1979. Sample selection bias as a specification error. Econometrica 47, 153-161.
Huyghebaert, N., Van de Gucht, L. and Van Hulle, C. 2007. The choice between bank debt and trade credit in business start-ups. Small Business Economics 29, 435-452.
Jensen, M., Meckling, W. 1976. Theory of the firm: Managerial behavior agency costs and capital structure. Journal of Financial Economics 3, 305-360.
King, R., Levine, R. 1993a. Finance and growth: Schumpeter might be right. Quarterly Journal of Economics 108, 717-738.
King, R., Levine, R. 1993b. Finance, entrepreneurship, and growth: theory and evidence. Journal of Monetary Economics 32, 513-542.
Love, I., Preve, L., and Sarria-Allende, V. 2007. Trade credit and bank credit: Evidence from recent financial crises. Journal of Financial Economics 83, 453-469.
Mach, T., Wolken, J. 2006. Financial services used by small businesses: Evidence from the 2003 Survey of Small Business Finance. Federal Reserve Bulletin Oct 2006, 167-195.
Meltzer, A. 1960. Mercantile credit, monetary policy and the size of firms. Review of Economics and Statistics 42(4), 429-436.
Mian, S., Smith, C. 1992. Accounts Receivable Management Policy: Theory and Evidence. The Journal of Finance 47, 169-200.
Ng, C., Smith, J. and Smith, R. 1999. Evidence on the determinants of credit terms used in interfirm trade credit. Journal of Finance 54, 1109-1129.
Nilsen, J. 2002. Trade credit and the bank lending channel. Journal of Money, Credit and Banking 34(1), 226-253.
Petersen, M., Rajan, R. 1994. The benefits of lending relationships: Evidence from small business data. Journal of Finance, 46(1), 3-37.
Petersen, M., Rajan, R. 1997. Trade Credit: Theories and Evidence. Review of Financial Studies 10(3), 661–691.
Rajan, R., Zingales, L. 1998. Financial dependence and growth. American Economic Review 88, 559-586.
Robb, A.M. 2002. Small business financing: Differences between young and old firms. Journal of Entrepreneurial Finance and Business Ventures 7, 45–65.
Smith, J. 1987. Trade credit and informational asymmetry. Journal of Finance 42, 863-872.
Schumpeter, J. 1934. The Theory of Economic Development. Translated by Redvers Opie. Harvard University Press, Cambridge, MA.
Van de Ven, W., Van Praag, B., The demand for deductibles in private health insurance: A probit model with sample selection. Journal of Econometrics 17, 229-252.
Wendt, P. 1947. The Availability of Capital to Small Businesses in California. The Journal of Finance 2 (2), 43-54.