A note on the price of trade credit

Managerial Finance - 2011
Astrid K.Chludek1
1Cologne Graduate School in Management, Economics and Social Sciences, University of Cologne, Cologne, Germany

Tóm tắt

PurposeIn contrast to common literature that suggests that trade credit is an extremely expensive source of financing with annual interest rates exceeding 40 percent, this paper seeks to argue that the average interest rate of trade credit does not exceed the cost of alternative funds, thereby explaining why trade credit constitutes a substantial part of the optimal financing mix of large, liquid, and capital market listed firms.Design/methodology/approachBesides providing a formula for estimating a firm's actual trade credit interest rate, this paper is mainly based on a descriptive analysis of trade credit use as well as on survey results of a broad range of prior studies.FindingsThe paper finds that highly liquid firms use substantial amounts of trade credit, thus indicating that trade credit use per se cannot be as expensive as literature supposes. In line, estimated average interest rates are about 4 to 6 percent.Originality/valueBy arguing that actual cost of trade credit use is far from being as high as literature supposes, this paper provides important implications for optimal short‐term financing strategies as well as for the assessment of trade credit use in credit worthiness analyses.

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Managerial Finance

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