When Trade Credit Facilitates Access to Bank Finance: Evidence from

While trade credit is traditionally considered as a substitute for bank loans, recent theoretical papers (e.g. Biais and Gollier (1997), Buckart and Ellingsen (2004)) suggest that bank debt and trade credit can also be considered as two complementary sources of financing. We suggest that these two hypotheses are related to different classes of firms and provide a missing link between them based on the incentive for good firms to invest in reputation. By using US small businesses data (NSSBF 1998), this paper provides an empirical analysis of these hypotheses. The empirical findings are consistent with the hypothesis that trade credit helps firms to improve their reputation. The results show that trade credit can work as a signal about firm’s quality and thus facilitates access to bank debt. JEL Classification: G3