is

Small Firms

Article
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International Small Business Journal
28(3) 215–233
Determinants of trade credit: © The Author(s) 2010
Reprints and permission: sagepub.
A comparative study of co.uk/journalsPermission.nav
DOI: 10.1177/0266242609360603
European SMEs http://isb.sagepub.com

Pedro Juan García-Teruel and

Pedro Martínez-Solano
University of Murcia, Spain

Abstract
This article presents the analysis of the determinants of the trade credit granted and received
by a panel of 47,197 SMEs in Europe over the period 1996–2002. Our results show a strong
homogeneity in the factors determining trade credit in European countries. On the one hand,
firms with greater capacity to obtain resources from the capital markets, and more cheaply,
grant more trade credit to their customers. Moreover, the results appear to support the price
discrimination theory. We also found that firms react by increasing the credit they grant in an
attempt to stem falling sales. On the other hand, larger firms, with greater growth opportunities
and greater investment in current assets, receive more finance from their suppliers.Where firms
have alternative sources of finance they are less likely to resort to vendor financing (substitution
effect).

Keywords
European countries, SMEs, trade credit, finance

Introduction
Trade credit occurs when there is a delay between the delivery of goods or the provision of services
by a supplier and their payment. For the seller this represents an investment in accounts receivable,
while for the buyer it is a source of financing that is classed under current liabilities on the balance
sheet. The level of accounts receivable (accounts payable) over assets for the countries considered
in this study ranges from 39.28% in Spain (28.52% in France) to 19.18% in Finland (13.17%
in Finland).
The literature offers various theories to explain the use of trade credit based on the advantages
for suppliers and for customers from the operational, commercial and financial perspective. First,

Corresponding author:
Pedro Juan García-Teruel, Dpto. Organización de Empresas y Finanzas, Facultad de Economía y Empresa, University of
Murcia, Campus de Espinardo, S/N, 30100-Murcia (SPAIN).
E-mail: [email protected]

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216 International Small Business Journal 28(3)

trade credit enables firms to create operating efficiencies and cost improvements by separating the
exchange of goods and their payment. This reduces cash uncertainty in their payments (Ferris,
1981) and provides more flexibility to respond to variations in demand (Emery, 1984, 1987).
Second, from a commercial perspective, trade credit may stimulate sales in a number of ways.
Terms of payment make it possible to modify the price of goods sold, in response to the increasing
period of credit or by increasing the discount for prompt payment, which is an implicit price reduc-
tion, and in these ways trade credit can be used as a mechanism of price discrimination (Brennan
et al., 1988; Petersen and Rajan, 1997). Moreover, trade credit can be used to maintain long-term
relationships with customers (Ng et al., 1999), and suppliers may be interested in the survival of
their customers, due to the shared rent from long-standing business relationships (Cuñat, 2007).
Trade credit also allows sellers to offer quality guarantees to buyers and gives buyers time to assess
product quality before paying (Lee and Stowe, 1993; Long, Malitz, and Ravid, 1993; Smith,
1987). Finally, in relation to financial motives, firms with better access to the credit market and
with lower costs can act as financial intermediaries and grant financing to firms that find it difficult
to access credit (Emery, 1984; Mian and Smith, 1992; Schwartz, 1974). Moreover, the use of trade
credit can help firms to obtain bank financing, since trade credit transmits information about the
borrower’s creditworthiness to the credit institution (Biais and Gollier, 1997).
Trade credit is particularly important for firms that have more difficulty funding themselves
through credit institutions, as is the case for small and medium-sized enterprises (SMEs), whose
access to the capital markets is very limited (Petersen and Rajan, 1997), and who use less external
finance, especially bank finance (Beck et al., 2008), and rely more on short-term debt finance
(García-Teruel and Martínez-Solano, 2007; Peel et al., 2000). In spite of the importance of trade
credit for SMEs, given their greater difficulty in accessing the capital markets, most previous stud-
ies that analysed the determinants of trade credit granted and received have focused on large firms
(see for example Cheng and Pike, 2003; Deloof and Jegers, 1996, 1999; Long et al., 1993; Pike
et al., 2005). Empirical evidence about small and medium-sized firms is scarce and focused on
Anglo-Saxon countries such as the US (Elliehausen and Wolken, 1993; Petersen and Rajan, 1997)
or the UK (Wilson and Summers, 2002). An exception is the study by Niskanen and Niskanen
(2006), which focused on small Finnish firms. These previous studies show the important influ-
ence of operational, financial and commercial motives on trade credit (Elliehausen and Wolken,
1993; Petersen and Rajan, 1997), while Niskanen and Niskanen (2006) found that price discrimi-
nation was not a determinant of small Finnish firms’ trade credit policies.
This article uses a firm-level database to examine the trade credit decisions of SMEs in a sample
of seven European countries (Belgium, Finland, France, Greece, Spain, Sweden and the UK). The
purpose of this study is twofold: first, to provide evidence on the role of trade credit in European
small and medium-sized firms, and second, since there are important differences in trade credit
levels between countries (Demirgüc-Kunt and Maksimovic, 2002; Marotta, 2005), to analyse
whether the factors that determine the level of trade credit differ among the European countries.
Moreover, from a methodological perspective, the current work improves on previous work ana-
lysing SMEs by using panel data methodology. This methodology allows us to study the determi-
nants of trade credit by considering the evolution of the firms over time. It also offers the advantage
that we can control for the existence of unobservable heterogeneity, as more than one cross-section
is used (Baltagi, 2001; Wooldrigdge, 2002).
Our results show that trade credit determinants are in general consistent among the different
European countries, in spite of the differences in the level of trade credit granted and received.
Specifically, with regard to trade credit granted, firms finance a higher proportion of their sales
when they are larger, have greater access to short-term finance, experience lower sales growth,

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García-Teruel and Martínez-Solano 217

generate higher margins, have higher turnover of assets, and incur lower costs for their outside
finance. Furthermore, financing through suppliers is higher in larger firms, those with higher sales
growth, higher investment in current assets, and less access to alternative financing, whether in the
form of internally generated cash flows or short-term or long-term debt. Resorting to suppliers for
financing also increases when debt becomes more costly.
The remainder of this paper is organized as follows: in Section 2 we review the different theo-
ries explaining the extent of trade credit. In Section 3 we describe the sample used. In the fourth
section we present the description of the variables and the model specification. Subsequently, we
comment on our results. The work ends with our main conclusions.

Background
The financial literature presents several theories to explain the existence and use of trade credit.
Specifically, there are financial, operational and commercial motives.

Financial motives
The financial literature establishes that sellers of products have advantages over financial institu-
tions when it comes to information acquisition and monitoring of debtors. This enables certain
non-financial firms with high creditworthiness to obtain funds to help other firms which have dif-
ficulties accessing capital markets because of their low credit rating (Emery, 1984; Mian and
Smith, 1992; Petersen and Rajan, 1997; Schwartz, 1974; Smith, 1987). Specifically, suppliers may
have greater ability to obtain information, due to the continuous contact with customers. The vol-
ume and frequency of orders can provide suppliers with information about their customers’ current
financial situation. Moreover, they have greater control of the customers, as the sellers can cut off
supply of the merchandise that is purchased regularly. This is particularly important when there are
few suppliers in the market, and the customers have a significant dependence on their supplier.
Finally, sellers have advantages in the liquidation of the products sold in the case of non-payment.
The merchandise is a more valuable collateral for suppliers than it is for financial institutions. In
the case of non-payment, it can be recovered and sold to another customer. Thus, the level of trade
credit will depend on the creditworthiness of the firm and the availability and cost of financial
resources from banks. Consequently, we expect that firms with easier access to the capital markets
at less cost will grant more trade credit, while those with fewer financial options will resort more
to trade credit from their suppliers.

Operational motives
In the absence of trade credit, firms would have to pay for their purchases on delivery. If the fre-
quency of purchase is either unknown or varies in time, firms need to keep a precautionary level of
cash holdings to settle these payments. Trade credit produces operating efficiencies and cost
improvements through the separation of exchange of goods and payment. This makes it possible to
reduce uncertainty abut the level of cash that needs to be held to settle payments (Ferris, 1981) and
provides more flexibility in the conduct of operations, since the capacity to respond to fluctuations
is provided elsewhere (Emery, 1984, 1987). As Emery (1987) pointed out, this reason for extend-
ing trade credit is motivated purely by a desire to increase operating flexibility, and he suggests that
when a firm’s sales are cyclical, or are subject to fluctuations, they can use trade credit to provide
a reward for customers who acquire merchandise in periods of low demand. In this way, by

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218 International Small Business Journal 28(3)

relaxing the credit terms the sellers can reduce the storage costs of the excessive inventories that
would accumulate if they kept production constant. This also allows firms to avoid the cost of
changing their production levels. This was supported by Long et al. (1993), who found that firms
with variable demand granted a longer trade credit period than firms with stable demand. It follows
that trade credit granted can be used to stimulate sales, and that we would therefore expect that
firms may used more trade credit when their sales growth is low. Furthermore, the existence of
sales growth in a firm is also a factor that positively affects the demand for finance in general, and
for trade credit in particular. Consequently we should expect that firms with greater increases in
sales will use more trade credit in order to finance their new investment in current assets.

Commercial motives
Trade credit can be used as a form of price discrimination by firms, according to whether delays in
payment are allowed or not (Brennan et al., 1988; Mian and Smith, 1992). Prolonging the period
of credit or raising the discount for prompt payment effectively equates to a price reduction. In this
way, the same product can be sold at different prices to different customers. Petersen and Rajan
(1997) found support for the price discrimination theory in a study that showed that firms with
higher profit margins have more interest in raising their sales. This is due to the fact that the mar-
ginal earnings they obtain are high, allowing them to incur additional costs to generate new sales.
The profits of this kind of firm come both from their commercial and their financial activities, and
thus they can more readily accept lower returns on the finance they grant. Consequently, we would
expect firms with higher profit margins to increase their trade credit levels.
Trade credit also can be considered as a way for suppliers to offer implicit guarantees. In this
respect, Smith (1987) pointed out that suppliers can transmit information about the quality of their
products by agreeing credit terms that allow their customers a period of evaluation. Likewise, lon-
ger payment deadlines can be conceded when the quality of the product is difficult to evaluate or
requires substantial time to analyse. Lee and Stowe (1993) argued that trade credit is the best way
of guaranteeing products. Then we should expect that smaller and younger firms will make more
use of this type of implicit guarantee, since their customers may doubt their capacity to comply
with the commitments they make, given that after the sale they could file for bankruptcy and not
honour formal commitments. Long et al. (1993) found that smaller and younger firms grant more
trade credit than firms with a more consolidated reputation in the market. Firms use trade credit to
signal the quality of their products. More recently, Pike et al. (2005) demonstrated that, in the US,
UK and Australia, trade credit can be used to reduce information asymmetries between buyers and
sellers. Consequently, we would expect that firms with high product quality will offer more trade
credit to their customers in order to allow them to evaluate product quality.

Sample and data

The data used in this study were obtained from the AMADEUS database. This database was devel-
oped by Bureau van Dijk and it is a comprehensive, pan-European database containing financial
information on 1.5m public and private companies in European countries.
The sample in our study comprised small and medium-sized firms from seven European
countries: Belgium, Finland, France, Greece, Spain, Sweden and the UK, for the period 1996 to
2002. The selection of SMEs was carried out according to the requirements established by the
European Commission recommendation 96/280/CE of 3 April 1996, on the definition of SMEs.
Specifically, the sample firms met the following conditions for at least three years: (1) fewer than

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García-Teruel and Martínez-Solano 219

Table 1. Accounts Receivable and Accounts Payable, by Sectors

Belgium Finland France Greece Spain Sweden UK p-value

Panel A: Mean values

of accounts receivable,
by sectors
Total accounts receivable 0.3542 0.1918 0.3555 0.3655 0.3928 0.2570 0.2858 0.00
Agriculture 0.2744 0.1394 0.3374 0.3276 0.2468 0.1351 0.1445 0.00
Mining 0.3089 0.1406 0.3196 0.3842 0.3201 0.1196 0.2322 0.00
Manufacturing 0.3264 0.1881 0.3781 0.3673 0.3960 0.2406 0.2983 0.00
Construction 0.4233 0.2240 0.5176 0.3098 0.5727 0.3992 0.3300 0.00
Retail trade 0.2179 0.1181 0.1265 0.2787 0.2249 0.1333 0.1440 0.00
Wholesale trade 0.4107 0.2727 0.3988 0.4754 0.4548 0.3296 0.3655 0.00
 Transport and public 0.3473 0.1529 0.3693 0.4018 0.3854 0.1830 0.2482 0.00
services
Services 0.4082 0.1897 0.3013 0.2442 0.3343 0.2278 0.2810 0.00

Panel B: Mean values

of accounts payable,
by sectors
Total accounts payable 0.2700 0.1317 0.2852 0.2670 0.2488 0.1641 0.1913 0.00
Agriculture 0.2275 0.0872 0.2124 0.2337 0.1724 0.1448 0.1203 0.00
Mining 0.1954 0.1338 0.2300 0.1709 0.1468 0.0820 0.1381 0.00
Manufacturing 0.2392 0.1116 0.2661 0.2397 0.2204 0.1398 0.1866 0.00
Construction 0.3145 0.1244 0.3166 0.2101 0.3539 0.2086 0.2859 0.00
Retail trade 0.3018 0.2190 0.3442 0.3912 0.2966 0.2092 0.2196 0.00
Wholesale trade 0.2934 0.1988 0.3760 0.3477 0.2872 0.2030 0.2316 0.00
 Transport and public 0.2567 0.1012 0.1910 0.3019 0.2084 0.1027 0.1535 0.00
services
Services 0.2653 0.0936 0.1878 0.1911 0.1702 0.1367 0.1413 0.00

Notes: Accounts receivable is calculated as ratio of trade debtors to assets. Accounts payable as ratio of trade creditors
to assets. Both panels include p-value of an ANOVA in order to test whether means are different.

250 employees; (2) turnover less than €40m; and (3) possession of less than €27m worth of total
assets. We selected a sample of around 200,000 SMEs that meet these criteria.
After this first trawl, the information obtained was refined. In this way, we eliminated cases with
missing values for some of the variables or with errors in the accounting data.1 For example, we
required that variables such as assets, current assets, fixed assets, liabilities, current liabilities and
capital be positive, as well as any other variable defined as positive. In addition, we eliminated 1%
of the extreme values (percentiles 1 and 99) presented by the variables defined in next section,
which might alter the results. As a result of applying these filters, we ended up with a panel consist-
ing of 47,197 firms and 185,157 observations.
Table 1 reports the mean values of trade credit granted and received by country and sector. We
compared the levels of accounts receivable and payable between countries. The results indicate
that the level of trade credit granted and received differs between countries.2 As regards the
accounts receivable, we observe that this represents an important proportion of the assets of the

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220 International Small Business Journal 28(3)

sample firms. It is noteworthy that the countries from the continental model (Belgium, France,
Greece and Spain) exhibit the highest levels of accounts receivable (ranging from 35.42% for
Belgium to 39.28% for Spain). In contrast, the lowest average figures of accounts receivable are
seen in the Scandinavian countries (19.18% for Finland, and 25.70% for Sweden), followed by the
UK with 28.58%. In addition, in an analysis by sectors in all countries, we see that the finance
granted does differ from one sector to another, where the construction and wholesale sectors have
high values, and the retail sector grants the least trade credit.
With regards the accounts payable, it is also Belgium, France, Greece and Spain that exhibit
higher levels of financing through suppliers (representing between 25% and 30% of liabilities).
Likewise, in all the countries studied, firms in the wholesale and retail sectors make most use of
this type of financing.
These differences on trade credit granted and received among countries are mainly explained,
following Marotta (2005), by the fact that initial terms of payment in Mediterranean countries
(France, Greece, Italy, Portugal and Spain) are much longer than in Nordic countries (Germany,
Scandinavia), and not because of late payment in Mediterraean countries. In fact, Omiccioli (2004)
shows that initial terms of payment in different European countries represent on average around
three-quarters of effective payment periods. These results are consistent with the European
Payment Index Report (2007).3 Moreover, the majority of companies do not apply penalties for late
payment (Wilner [2000] for the USA, Pike and Cheng [2001] for the UK, Marotta [2005] for Italy).
Table 1 shows that, on average, the accounts receivable by firms exceeds the accounts payable.
This is true for all countries and sectors, except for the retail sector, in which the firms are net
receivers of trade credit.
Having analysed the importance of financing between firms, and observed the different levels
of trade credit exhibited by countries, we now examine whether the factors determining the levels
of accounts receivable and payable differ between the countries considered.

Theoretical and empirical specification

Variables description
On the basis of the theoretical analysis and following mainly the study by Petersen and Rajan
(1997), we examine whether the particular characteristics of firms, such as the creditworthiness,
availability and cost of financial resources, sales growth, price discrimination, and the quality of
the products sold, can explain both the decisions to grant credit to customers and the demand credit
from suppliers in European SMEs.4 In order to do that, we build the following variables. First, we
present the dependent variables, followed by the variables which can be explanatory factors of both
accounts receivable and payable, and finally variables which are considered to be determinants of
accounts receivable or determinants of accounts payable, but not both.
The dependent variables have been built following Petersen and Rajan (1997). The first,
accounts receivable (RECEIV), is calculated as the ratio of accounts receivable to sales. Firms with
a higher value of RECEIV grant a higher proportion of the sales as trade credit to their customers.
The second, accounts payable (PAYAB), is defined as the ratio of accounts payable to total assets,
and captures the importance of trade credit in the financing of the firm’s assets.
As far as the explanatory factors that could affect accounts receivable and accounts payable, we
first use the size and age of the SME to measure its credit capacity and reputation, and therefore its
ability to access alternative sources of finance. LSIZE is calculated as the logarithm of the assets.
Larger firms are considered to have better creditworthiness and consequently easier access to funds in
the capital markets than smaller firms. Consequently, these firms will be better able to act as financial
intermediaries, granting credit to firms with greater financial constraints (Schwartz, 1974). In

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García-Teruel and Martínez-Solano 221

addition, larger firms (LSIZE) will conceivably use less credit from their suppliers, since they can go
to other sources of finance as a consequence of their credit capacity and reputation. However, Long et
al. (1993) argue that larger firms will have better reputations, and hence less need to offer credit to
their customers in order to guarantee their products. Thus, the expected relation between LSIZE and
RECEIV is not clear, while the expected relation between LSIZE and PAYAB is negative.
With regards to age, LAGE is defined as the logarithm of (1 + age), where age is the number of
years since the firm was founded. This variable can be interpreted in much the same way as the size
variable. Like Petersen and Rajan (1997), we introduce the variable LAGE squared to capture the
declining effect that the passing of time has in old firms.
We should also take into account the ability of firms to generate internal resources. Specifically,
the variable CFLOW is defined as the ratio of net profits plus depreciation to sales, and is used as
a proxy for the firm’s capacity to generate internal resources. We would expect firms with greater
capacity to generate internal funds to offer more finance to their customers. Conversely, a negative
relationship between cash flow and PAYAB is expected, since firms that generate more internal
finance will have less need to resort to credit from their suppliers. In that case, as PAYAB is calcu-
lated as a proportion of assets, we also divided net profits plus depreciation over assets (CFLOW2).
To control for the cost of external finance, we use the variable FCOST, defined as the ratio of
finance costs over the cost of external financing excluding trade creditors. As firms incur higher
costs to obtain their resources they will have less incentive to grant financing to their customers
and more incentives to demand financing from their suppliers, to the extent that this is possible. So,
we expect FCOST to be related negatively with RECEIV and positively with PAYAB.
To capture the effect of possible shocks in the production and sales on the accounts receivable,
we built the variables PGROWTH and NGROWTH. The first is calculated from the yearly positive
variations in the sales, and the second from the yearly negative variations in the sales. Although we
would expect an increase in trade credit when firms are growing, the effect associated with declin-
ing sales is not as clear. According to the previous reasoning we would expect firms to offer less
trade credit to their customers. But firms might also react by offering more trade credit, in an
attempt to stem the fall in their level of operations (Petersen and Rajan, 1997). Indeed, as Emery
(1987) demonstrated, trade credit can be used to stimulate sales in times of low demand. In this
way, firms cut the costs generated by rising stock levels and changes in production levels. Moreover,
firms with higher sales growth will have greater growth opportunities, so they will have an
increased demand for funds and consequently for trade credit.
Finally, there are some variables that are considered to be explanatory of accounts receivable
alone. First we include the short-term finance STLEV, which is calculated as the ratio of current
liabilities to sales. We would expect firms that are able to obtain more short-term resources to be
also able to grant more trade credit to their customers.
Trade credit can also be employed for the firm to transmit information about the quality of their
products via the trade credit they grant. To measure this, we use the variable TURN, calculated as
sales over assets, after accounts receivable have been deducted. According to Long et al. (1993),
this variable should have a negative relationship with the variable RECEIV, since firms with a
lower sales turnover produce higher quality goods. This is due to the better quality controls, imply-
ing a prolonging of the production cycle. These firms will, therefore, offer more trade credit to their
customers so that they can evaluate this quality.
The variable GPROF is calculated as the ratio of gross profit to sales. The variable aims to test
whether firms with higher margins offer more trade credit. Following Petersen and Rajan (1997),
we include the variable GPROF squared to moderate the effect of firms with high margins.
With reference to the additional variables which literature deems to be explanatory of accounts
payable alone, we have included STFIND, LTDEBT, CURRAS and PURCH. Variable STFIND,

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222 International Small Business Journal 28(3)

Table 2. Mean Values of Variables

Belgium Finland France Greece Spain Sweden UK

RECEIV 0.2019 0.0918 0.1807 0.3314 0.2653 0.1112 0.1468

PAYAB 0.2700 0.1317 0.2852 0.2671 0.2488 0.1641 0.1913
ASSET 6627.84 2486.88 2665.48 3677.68 6955.10 2096.72 5360.15
AGE 24.1004 18.1382 35.1517 12.9458 21.0702 20.5659 22.8162
CFLOW 0.0559 0.0802 0.0487 0.0853 0.0621 0.0480 0.0611
CFLOW2 0.0919 0.1544 0.0934 0.0895 0.0860 0.0969 0.1011
FCOST 0.0363 0.0351 0.0424 0.0891 0.0616 0.0365 0.0374
PGROWTH 0.1154 0.1870 0.1184 0.2196 0.1552 0.1761 0.1702
NGROWTH -0.0397 -0.0334 -0.0259 -0.0406 -0.0253 -0.0372 -0.0388
STLEV 0.3332 0.2120 0.2920 0.5099 0.3489 0.2008 0.3124
TURN 3.6546 3.1393 4.1729 2.8476 3.6759 4.0223 3.6722
GPROF 0.0314 0.0715 0.0387 0.0885 0.0538 0.0436 0.0392
STFIND 0.0971 0.0330 0.0740 0.1719 0.1499 0.0147 0.1933
LTDEBT 0.1354 0.1997 0.0998 0.0549 0.1000 0.2225 0.1147
CURRAS 0.7142 0.6123 0.7486 0.6807 0.6948 0.6852 0.6656
PURCH 1.1588 1.1576 1.0384 0.9690 1.2026 1.2404 1.5460
Notes: RECEIV finance conceded by firms to other companies and PAYAB finance received from suppliers; ASSET assets
(in thousand €); AGE years company in operation; CFLOW cash flows generated; CFLOW2 capacity to generate internal
resources (calculated over assets); FCOST cost external financing; PGROWTH positive sales growth; NGROWTH
negative growth; STLEV short-term finance; TURN assets turnover; GPROF gross profit margin; STFIND short-term
finance received from financial institutions; LTDEBT long-term debt; CURRAS investment in current assets; PURCH
purchases made.

measured as the ratio of short-term financial debt to assets, should be negatively related with the
dependent variable, since access to short-term bank debt could reduce the need for trade credit,
which normally has higher implicit interest rates (substitution effect). Following Deloof and Jegers
(1999), we also include the variable LTDEBT, defined as the ratio of long-term debt to assets, to test
whether there is a substitution effect between long-term debt and debt provided by the suppliers.
On the other hand, on the assumption that firms tend to match the maturity of their liabilities and
the liquidity of their assets, we introduce the variable CURRAS, defined as the ratio of current
assets to total assets. We would expect firms that have made a bigger investment in current assets
to use more short-term finance in general, and more trade credit in particular.
The variable PURCH, measured as the ratio of purchases to assets, allows us to control for the
quantity of credit offered by the sellers to their customers.
In Table 2 we report the average values of the variables described earlier for the different coun-
tries considered. As can be seen from Table 2, firm size varies according to the country. On aver-
age, Belgian and Spanish firms have the most assets (more than €6m). As far as age is concerned,
French firms are the oldest (over 35 years), while Greek firms barely exceed 12 years. It is also the
Greek firms that take on the highest levels of short-term finance, generate more internal resources,
and pay more for their outside finance. With regard to operational profitability, the best margins are
obtained by the Greek firms (a gross profit of almost 9% of sales).
We should also highlight the weight of the current assets on the European firms’ balance sheets,
with the value of CURRAS ranging from 61% for Finnish firms to 74% for French ones. Long-
term debt is relatively low, with Sweden and Finland (22% and 19%, respectively) being the

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García-Teruel and Martínez-Solano 223

countries that use this type of financing most. We also see that the use of short-term financial debt
differs from country to country. Compared to Sweden and Finland, where this type of debt is barely
used, we note that it represents almost 20% of the total financing of British firms.

Model specification
To study the determinants of accounts receivable and accounts payable we estimate the following
models using a panel data model:

Model 1:
RECEIVit = β0+ β1 LSIZEit + β2 LAGEit + β3 LAGEit2+ β4 CFLOWit + β5 STLEVit + β6 FCOSTit + β7
PGROWTHit + β8 NGROWTHit + β9 TURNit +β10 GPROFit + β11 GPROFit2 + µi +λt+ eit (1)

Model 2:
PAYABit = β0+ β1 LSIZEit + β2 LAGEit + β3 LAGEit2+ β4 CFLOW2it + β5 STFINDit + β6 LTDEBTit + β7
FCOSTit + β8 PGROWTHit + β9 NGROWTHit + β10 CURRASit + β11 PURCHit + µi +λt+ eit (2)

where RECEIVit represents the trade credit granted by firm i at time t to its customers and PAYABit
the finance received by firm i at time t from its suppliers; LSIZEit the size; LAGEit the age of the
company in years; CFLOWit the cash flows generated by the firm; STLEVit the short-term financ-
ing; FCOSTit the cost of outside financing; PGROWTHit the positive sales growth; NGROWTHit
the negative sales growth; TURNit the assets turnover; GPROFit the gross profit margin; STFINDit
the short-term financing received from financial institutions; LTDEBTit the long-term debt;
CURRASit the investment in current assets; and, PURCHit the purchases made. In addition, µi
controls for the unobservable characteristics of each firm (the executives’ management capacity,
their personal skills, etc.), which are constant over time. λt are time dummy variables that change
over time, but are equal for all the firms in each of the years considered. In this way, we attempt to
capture certain economic factors (interest rates, prices, etc.) that vary over time and can possibly
affect the decision to grant trade credit. eit are the random disturbances.
Our strategy is to test first whether individual effects exist, and, if so, to identify which is the
best model to estimate them. We use the Breusch-Pagan (1980) test to identify the existence of
individual effects. If we reject the null hypothesis of no unobserved heterogeneity, then a model
capturing individual heterogeneity is appropriate. Thus, it is first necessary to determine if there is
a correlation between the unobservable heterogeneity, µi, of each firm, and the explanatory vari-
ables of the model. If there is a correlation (fixed effects), the consistent estimation would be
obtained by the within-group estimator. If there is not (random effects), a more efficient estimator
can be obtained by estimating the equation in levels by generalized least squares (GLS). The usual
strategy for the specification of the fixed or random nature of the effects is to apply the Hausman
(1978) test under the null hypothesis E(µi/xit) = 0. If the null hypothesis is rejected, the effects are
considered to be fixed, and the estimation of the model is carried out by ordinary least squares. If
the null hypothesis is accepted, we would have the case of random effects, and the model would
then be estimated by GLS. In this way, a more efficient estimator of β is obtained.5

Results
In Table 3 we report the results obtained from the estimations of Model 1 for the different countries.
In general, these results show that there are indeed certain aspects that affect the firm’s decision to
offer trade credit to its customers that are similar regardless of the firm’s country of origin.

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224 International Small Business Journal 28(3)

Table 3. Determinants of Accounts Receivable (I)

Belgium Finland France Greece Spain Sweden UK

LSIZEit 0.0396*** 0.0235*** 0.0413*** 0.0465*** 0.0388*** 0.0235*** 0.0175***

(18.00) (16.53) (22.80) (13.89) (16.52) (18.46) (16.11)
LAGEit 0.0474* -0.0190 0.0641 0.0504 -0.0395 -0.0287* -0.0085
(1.89) (-1.13) (1.23) (1.15) (-1.47) (-1.81) (-0.65)
LAGEit2 -0.0162** 0.0030 -0.0190 -0.0101 0.0138 0.0052 -0.0032
(-2.08) (0.53) (-1.57) (-0.61) (1.60) (1.00) (-0.76)
CFLOWit -0.0522*** 0.0443*** 0.0398*** 0.0563*** 0.0030 0.0035 0.0000
(-3.57) (3.88) (3.14) (5.18) (0.19) (0.35) (-0.04)
STLEVit 0.1857*** 0.1540*** 0.2772*** 0.2784*** 0.3494*** 0.2242*** 0.1089***
(40.40) (32.81) (58.21) (56.05) (70.64) (48.16) (43.94)
FCOSTit -0.1297*** -0.1098*** -0.3097*** -0.0118 -0.1982*** -0.1395*** -0.1647***
(-4.39) (-5.66) (-19.58) (-0.74) (-13.09) (-7.91) (-12.18)
PGROWTHit -0.0061*** -0.0038*** -0.0231*** -0.0088*** -0.0083*** -0.0044*** -0.0012
(-2.91) (-3.96) (-11.75) (-4.40) (-5.71) (-6.05) (-1.23)
NGROWTHit -0.0696*** -0.0330*** -0.0477*** -0.1166*** -0.0879*** -0.0253*** -0.0204***
(-13.02) (-7.84) (-9.88) (-12.72) (-14.35) (-7.57) (-6.81)
TURNit 0.0052*** 0.0079*** 0.0123*** 0.0072*** 0.0063*** 0.0049*** 0.0009***
(20.29) (27.18) (51.10) (15.99) (27.91) (31.56) (15.41)
GPROFit 0.0948*** 0.0246** 0.1020*** 0.0383*** 0.0609*** 0.0388*** 0.0311***
(6.39) (2.33) (8.42) (2.94) (3.95) (5.47) (6.88)
GPROFit2 -0.2083*** -0.0084 -0.2540*** -0.0076 -0.0202 -0.0505* -0.0961***
(-3.20) (-0.21) (-3.90) (-0.23) (-0.34) (-1.68) (-5.65)
C -0.2028*** -0.1062*** -0.2330*** -0.2728*** -0.2033*** -0.0769*** 0.0257**
(-8.33) (-8.03) (-5.01) (-8.72) (-8.01) (-5.95) (2.28)
P-Breusch- 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Pagan
P-Hausman 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Firms 4276 3572 5812 5458 8990 7906 11183
Observations 19554 15607 26145 23079 29967 26481 44324

Notes: RECEIV finance conceded by firms to other companies; LSIZE log (assets); LAGE log (1+ years company in
operation); CFLOW cash flows generated; STLEV short-term finance; FCOST cost external financing; PGROWTH
positive sales growth; NGROWTH negative growth; TURN assets turnover; GPROF gross profit margin. Results obtained
by fixed effects estimation. Coefficients of time dummies not reported.
t-statistic in parentheses.
* significant at 90%; ** significant at 95%; *** significant at 99%.
P-Breusch-Pagan is the p-value in Breusch-Pagan’s (1980) test. If the null hypothesis is rejected individual effects are
present in the data.
P-Hausman is p-value of Hausman (1978) test. If the null hypothesis rejected, only within-group estimation is consistent.
If accepted, estimation by random effects is the best option, since it is consistent and also more efficient than the within-
group estimator.

First, firm size is seen to be a determinant factor of the accounts receivable. Specifically, in all
the countries analysed, we found a positive relationship between size and trade credit granted.
Thus, larger firms finance their customers more than small ones. This result was expected, since
large firms can obtain finance more easily and hence can act as financial intermediaries. However,

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García-Teruel and Martínez-Solano 225

although our findings confirm Petersen and Rajan’s (1997) results for the US market, they do not
support the position taken by Long et al. (1993) with regards the trade credit granted to customers
and the quality of the products sold.
In that respect, and contrary to Long et al. (1993), we did not observe a clear effect of age on the
dependent variable. Only for Belgium and Sweden is the coefficient associated with this variable
significant at the 10% level, and, what is more, the sign obtained is different in each case. Thus, the
age of the firm does not appear to affect the managers when taking decisions about offering trade
credit to their customers.
We do confirm, in line with the findings for the size variable, that regardless of the SME’s coun-
try of origin, greater access to short-term financing implies increased financing of customers.
Moreover, and as we would expect, firms incurring higher costs for their finance reduce their inter-
mediation activity, cutting the sales they finance to their customers. Thus, the firms are clearly
channelling funds to the extent to which they are capable of obtaining resources at lower cost.
With regards the effect that the capacity to generate internal funds has on the granting of trade
credit, the results obtained here show that the significance of this variable depends on the country
being analysed. Although, as expected, Finnish, French and Greek SMEs that generate more
resources grant more trade credit to their customers, this result is not repeated for Spanish, Swedish
or British firms. A negative and significant relationship between the variables is found for Belgian
firms, as has also been found in the American market.
On the other hand, the results for the growth variables do coincide for all the countries studied.
Thus, and in contrast to earlier evidence from American SMEs (Petersen and Rajan, 1997), we find
that in European countries there is generally an inverse relation between the sales growth and the
variable RECEIV. This indicates that firms enjoying higher sales growth reduce the finance levels
granted to their customers. In contrast, and consistent with findings from the USA, firms with
negative sales growth raise the proportion of their financed sales. These results suggest that firms
are using trade credit as a marketing mechanism to improve their sales figures. If their sales have
slow or negative growth, they resort more to this mechanism.6
As far as the variable TURN is concerned, which is introduced to test Long et al.’s (1993)
hypothesis of quality signalling, the results obtained – which are common to all the countries –
do not allow us to support this idea. In fact, in contrast to what we would expect, it is the firms
with highest turnover which finance their sales most. This suggests that they produce goods
whose quality is easiest to verify, which finance their sales most. However, this is consistent with
the relation previously found between the dependent variable and size. Larger firms, and conse-
quently those with more reputation (which intuitively do not need to transmit signals about the
quality of their products by granting more trade credit), finance their customers more than
smaller firms. Deloof and Jegers (1996), in a study of large Belgian firms, did not find evidence
confirming the quality signalling theory either.
Furthermore, and as we expected, the weight of trade credit as a proportion of sales is positively
related to the gross profit margin in the European countries. This supports Petersen and Rajan’s
(1997) argument that firms with higher margins are more ready to grant financing to their custom-
ers. Indeed, firms with higher margins will have more incentive to sell, even if they have to finance
the sales to do so. The dilution of the effect that can occur if the margins generated are very high is
detected for all the countries except Finland, Greece and Spain. Thus, we conclude that firms use
trade credit as a price discrimination mechanism. In this respect, we might suggest that the firm’s
interest in discriminating in favour of riskier customers when they decide to sell to them using
trade credit lies not only in the short-term profit obtained, but also, and more importantly, in the
future profits to be gained from maintaining the commercial relationship with them.

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226 International Small Business Journal 28(3)

Given that it is the variable CFLOW that shows most divergence between the countries
analysed, we now examine in more detail the effect of this variable on a firm’s decision to finance
their customers. With this in mind, we repeat the previous estimations, breaking down the internal
resources generated into positive and negative cash flows (PCFLOW and NCFLOW).7 The results
obtained (Table 4) demonstrate the different effect that the capacity to generate internal flows has
in the different countries. The relationship between the dependent variable and PCFLOW is similar
to that found with CFLOW. Moreover, the greater detail provided by disaggregating CFLOW also
allows us to see that, for British firms, there is a relation between the internal cash flows and the
accounts receivable, although it only holds when the cash flows generated are negative. Neither the
signs nor the significance of the remaining variables change in this analysis.
In Table 5 we report the results of the estimation of Model 2 for the different countries. First, we
observe that the relation between the variables PAYAB and LSIZE is positive and significant for all
the countries. Thus, and in contrast to what we expected, it is the larger firms, which normally have
more possibility of obtaining external financing, that receive a higher proportion of their financing
from their suppliers. In this respect, we note that a similar result was found in some of the estima-
tions carried out by Petersen and Rajan (1997). This could be explained by considering that the
level of accounts payable is determined both by the financing demands that firms make and by the
offers of trade credit that they receive. Hence we could suspect that larger firms, given their supe-
rior creditworthiness, will have more access to this type of financing.
The signs of the estimated coefficients of the age variable confirm the previous result to a large
extent. In this case too it is the older firms that use financing from suppliers more than the younger
ones. However, the results for this variable by country are not as homogeneous as those found for
the variable LSIZE.
The results confirm a substitution effect between supplier-provided credit and other sources of
financing. There is an inverse relation between the level of financing from suppliers and the resources
generated internally by the firm. In all the firms analysed, without exception, and in line with Petersen
and Rajan’s (1997) findings for small US firms, the firms generating more resources internally resort
less to debt from suppliers. This can be explained by their reduced need for external funding.
Moreover, we observe a negative relation between the dependent variable and the variable STFIND.
Thus, the sample firms reduce their levels of debt from suppliers when they have the chance to access
other short-term financial resources. And third, and as Deloof and Jegers (1999) found for large
Belgian firms, there is a substitution effect between the dependent variable and the use of long-term
debt. In all cases, these relationships can be explained by the high cost of financing from suppliers.
As in the model for the accounts receivable, we controlled for the cost of the external financing
received. The result obtained – which was similar for all the countries – shows that firms increase
their use of financing from suppliers when the financial costs of other sources are higher. In addi-
tion, this finding adds consistency to the inverse relation found between the dependent variable and
the proxies for the other financing options considered. Indeed, firms incurring higher costs in their
external financing have more incentive to resort to trade credit.
On the other hand, for all the countries analysed, we observe that the level of accounts payable
is positively affected by the growth/decline in sales. Thus, firms with growth opportunities, which
consequently have a higher demand for funds, rely on the support of their suppliers to finance this
growth.
We also found in the sample of European firms studied here, that firms match the maturity of
short-term assets and liabilities. The relationship found between the variables PAYAB and
CURRAS is positive, meaning that firms that invest more in current assets use more short-term
financing such as trade credit.

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García-Teruel and Martínez-Solano 227

Table 4. Determinants of Accounts Receivable (II)

Belgium Finland France Greece Spain Sweden UK

LSIZEit 0.0396*** 0.0235*** 0.0411*** 0.0471*** 0.0388*** 0.0235*** 0.0173***

(18.00) (16.53) (22.72) (14.059 (16.51) (18.45) (15.91)
LAGEit 0.0474* -0.0190 0.0657 0.0492 -0.0395 -0.0286* -0.0087
(1.89) (-1.13) (1.26) (1.13) (-1.47) (-1.80) (-0.66)
LAGEit2 -0.0162* 0.0030 -0.0193 -0.0098 0.0138 0.0052 -0.0031
(-2.08) (0.53) (-1.60) (-0.60) (1.60) (1.00) (-0.73)
PCFLOWit -0.0469*** 0.0442*** 0.0239* 0.0939*** 0.0031 0.0114 -0.0003
(-2.74) (3.59) (1.68) (6.79) (0.18) (0.98) (-0.36)
NCFLOWit -0.0698** 0.0451 0.1184*** -0.0461* 0.0025 -0.0250 0.0484***
(-2.15) (1.23) (3.42) (-1.79) (0.06) (-1.05) (3.71)
STLEVit 0.1856*** 0.1540*** 0.2775*** 0.2771*** 0.3494*** 0.2242*** 0.1095***
(40.35) (32.80) (58.26) (55.70) (70.63) (48.15) (44.10)
FCOSTit -0.1302*** -0.1098*** -0.3097*** -0.0127 -0.1982*** -0.1400*** -0.1638***
(-4.41) (-5.66) (-19.58) (-0.79) (-13.09) (-7.94) (-12.11)
PGROWTHit -0.0061*** -0.0038*** -0.0231*** -0.0090*** -0.0083*** -0.0044*** -0.0011
(-2.90) (-3.95) (-11.74) (-4.48) (-5.71) (-6.02) (-1.14)
NGROWTHit -0.0695*** -0.0330*** -0.0481*** -0.1149*** -0.0879*** -0.0252*** -0.0204***
(-13.01) (-7.83) (-9.95) (-12.53) (-14.34) (-7.56) (-6.81)
TURNit 0.0052*** 0.0079*** 0.0123*** 0.0072*** 0.0063*** 0.0049*** 0.0009***
(20.30) (27.15) (51.03) (16.05) (27.90) (31.59) (15.39)
GPROFit 0.0965*** 0.0246** 0.0949*** 0.0492*** 0.0609*** 0.0406*** 0.0210***
(6.39) (2.24) (7.61) (3.71) (3.80) (5.62) (3.98)
GPROFit2 -0.2308*** -0.0079 -0.1755** -0.0728** -0.0206 -0.0741** -0.0656***
(-3.08) (-0.18) (-2.42) (-2.02) (-0.30) (-2.12) (-3.47)
C -0.2034*** -0.1062*** -0.2324*** -0.2781 *** -0.2033*** -0.0773 *** 0.0267**
(-8.35) (-8.03) (-4.99) (-8.89) (-8.01) (-5.98) (2.37)
P-Breusch- 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Pagan
P-Hausman 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Firms 4276 3572 5812 5458 8990 7906 11183
Observations 19554 15607 26145 23079 29967 26481 44324

Notes: RECEIV finance conceded by firms to other companies; LSIZE log (assets); LAGE log (1+ years company in
operation); PCFLOW positive cash flows generated; NCFLOW negative cash flows generated; STLEV short-term finance;
FCOST cost external financing; PGROWTH positive sales growth; NGROWTH negative growth; TURN assets turnover;
GPROF gross profit margin. Results obtained by fixed effects estimation. Coefficients of time dummies not reported.
t-statistic in parentheses.
* significant at 90%; ** significant at 95%; *** significant at 99%.
P-Breusch-Pagan is the p-value in Breusch-Pagan’s (1980) test. If the null hypothesis is rejected individual effects are
present in the data.
P-Hausman is p-value of Hausman (1978) test. If the null hypothesis rejected, only within-group estimation is consistent.
If accepted, estimation by random effects is the best option, since it is consistent and also more efficient than the within-
group estimator.

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228 International Small Business Journal 28(3)

Table 5. Determinants of Accounts Payable (I)

Belgium Finland France Greece Spain Sweden UK

LSIZEit 0.0471*** 0.0152*** 0.0457*** 0.0345*** 0.0396*** 0.0192*** 0.0129***

(16.51) (6.65) (19.55) (14.00) (16.69) (9.08) (7.84)
LAGEit 0.0744** 0.0603** 0.0431 -0.0884*** 0.0741*** 0.0096 0.0402**
(2.24) (2.17) (0.61) (-2.78) (2.69) (0.36) (2.03)
LAGEit2 -0.0391*** -0.0257*** -0.0340** 0.0108 -0.0425*** -0.0119 -0.0255***
(-3.79) (-2.73) (-2.07) (0.90) (-4.81) (-1.37) (-4.01)
CFLOW2it -0.2567*** -0.1601*** -0.2830*** -0.2355*** -0.2368*** -0.1268*** -0.0087***
(-27.21) (-23.99) (-38.50) (-29.00) (-26.64) (-20.83) (-8.00)
STFINDit -0.3077*** -0.1001*** -0.2700*** -0.3818*** -0.3484*** -0.1979*** -0.1670***
(-38.48) (-7.67) (-38.45) (-51.37) (-58.10) (-12.52) (-46.47)
LTDEBTit -0.3032*** -0.1166*** -0.2274*** -0.3368*** -0.2654*** -0.1604*** -0.1461***
(-35.72) (-19.09) (-35.17) (-29.81) (-39.14) (-31.46) (-27.29)
FCOSTit 0.8029*** 0.5394*** 0.6693*** 0.1724*** 0.5000*** 0.7712*** 0.5150***
(20.42) (16.64) (30.75) (14.69) (31.64) (25.73) (25.52)
PGROWTHit 0.0288*** 0.0029* 0.0353*** 0.0158*** 0.0131*** 0.0071*** 0.0130***
(10.18) (1.81) (13.15) (10.77) (8.77) (5.79) (9.31)
NGROWTHit 0.0672*** 0.0516*** 0.0847*** 0.0297*** 0.0995*** 0.0452*** 0.0302***
(9.41) (7.39) (12.96) (4.47) (15.54) (8.10) (6.90)
CURRASit 0.1249*** 0.0742*** 0.1298*** 0.0959*** 0.1289*** 0.0858*** 0.0942***
(15.64) (11.44) (19.53) (12.92) (21.85) (15.64) (18.98)
PURCHit 0.0136*** 0.0168*** -0.0012 0.0190*** 0.0135*** 0.0025* 0.0142***
(6.09) (10.55) (-0.68) (8.11) (8.10) (81.95) (13.37)
C -0.0361 0.0389* 0.1241* 0.1497*** 0.0259 0.0590** 0.1425***
(-1.08) (1.72) (1.95) (6.11) (0.95) (2.43) (8.01)
P-Breusch- 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Pagan
P-Hausman 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Firms 4276 3572 5812 5458 8990 7907 10087
Observations 19554 15607 26145 23079 26967 26506 39328

Notes: PAYAB finance received from suppliers; LSIZE log (asset); LAGE log (1+ years company in operation); CFLOW2
capacity to generate internal resources (calculated over assets); STFIND short-term finance received from financial
institutions; LTDEBT long-term debt; FCOST cost external finance; PGROWTH and NGROWTH positive and negative
sales growth; CURRAS investment in current assets; PURCH purchases made. Results obtained by fixed effects
estimation. Coefficients of time dummies not reported.
t-statistic in parentheses.
* significant at 90%; ** significant at 95%; *** significant at 99%
P-Breusch-Pagan is the p-value in Breusch-Pagan’s (1980) test. If the null hypothesis is rejected individual effects are
present in the data.
P-Hausman is p-value of Hausman (1978) test. If the null hypothesis rejected, only within-group estimation is consistent.
If accepted, estimation by random effects is the best option, since it is consistent and also more efficient than the within-
group estimator.

Table 6 reports the results obtained when we include a greater disaggregation of the current
assets in the model proposed (Equation 2).8 With this we attempt to analyse more explicitly the
specific entry items that determine the demand for credit from suppliers. In general, the patterns of
financing seen in the different countries are similar, with a positive relation between trade credit
and investment in cash holdings, trade debtors and inventories. This result is in contrast to Deloof

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García-Teruel and Martínez-Solano 229

Table 6. Determinants of Accounts Payable (II)

Belgium Finland France Greece Spain Sweden UK

LSIZEit 0.0500*** 0.0172*** 0.0507*** 0.0364*** 0.0410*** 0.0202*** 0.0168***

(17.60) (7.60) (21.29) (14.82) (17.30) (9.15) (9.81)
LAGEit 0.0584* 0.0450 0.0410 -0.0880*** 0.0706** 0.0197 0.0111
(1.77) (1.63) (0.56) (-2.78) (2.56) (0.72) (0.54)
LAGEit2 -0.0352*** -0.0207*** -0.0353** 0.0095 -0.0422*** -0.0151* -0.0165**
(-3.43) (-2.22) (-2.10) (0.79) (-4.78) (-1.70) (-2.51)
CFLOW2it -0.2550*** -0.1481*** -0.2657*** -0.2267*** -0.2246*** -0.1248*** -0.0074***
(-27.15) (-21.83) (-34.83) (-28.02) (-25.22) (-19.70) (-6.86)
STFINDit -0.3148*** -0.1157*** -0.2892*** -0.3817*** -0.3608*** -0.2103*** -0.1683***
(-39.30) (-8.99) (-40.11) (-51.64) (-59.57) (-12.87) (-44.59)
LTDEBTit -0.3044*** -0.1184*** -0.2373*** -0.3362*** -0.2562*** -0.1760*** -0.1512***
(-36.80) (-19.92) (-37.23) (-30.15) (-37.57) (-34.12) (-28.13)
FCOSTit 0.7842*** 0.5156*** 0.6130*** 0.1645*** 0.4865*** 0.7598*** 0.4667***
(20.06) (16.13) (27.63) (14.11) (30.79) (24.60) (22.51)
PGROWTHit 0.0289*** 0.0025 0.0346*** 0.0162*** 0.0128*** 0.0082*** 0.0106***
(10.25) (1.58) (12.77) (11.07) (8.59) (6.48) (7.32)
NGROWTHit 0.0574*** 0.0433*** 0.0803*** 0.0310*** 0.0943*** 0.0404*** 0.0211***
(8.06) (6.26) (12.07) (4.69) (14.74) (6.98) (4.66)
CASHit 0.0344*** 0.0020 0.0182*** 0.0487*** 0.0612*** 0.0120* -0.0221***
(3.68) (0.28) (2.73) (5.76) (8.28) (1.92) (-4.37)
RECEIV2it 0.2070*** 0.1519*** 0.1346*** 0.1147*** 0.1548*** 0.1245*** 0.1269***
(24.76) (19.87) (20.37) (15.46) (23.32) (19.71) (26.24)
INVENTit 0.0948*** 0.0788*** 0.1336*** 0.1799*** 0.1880*** 0.0806*** 0.1445***
(8.66) (9.51) (15.51) (16.49) (22.13) (10.46) (21.03)
PURCHit 0.0073*** 0.0151*** -0.0022 0.0158*** 0.0127*** -0.0004 0.0103***
(3.23) (9.60) (-1.27) (6.75) (7.60) (-0.27) (9.29)
C -0.0478 0.0279 0.1333** 0.1309*** 0.0079 0.0682*** 0.1266***
(-1.44) (1.26) (2.03) (5.37) (0.29) (2.73) (6.93)
P-Breusch- 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Pagan
P-Hausman 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Firms 4264 3564 5781 5458 8957 7755 9799
Observations 19303 15524 25346 23078 29763 25135 36341

Notes: PAYAB finance received from suppliers; LSIZE log (asset); LAGE log (1+ years company in operation); CFLOW2
capacity to generate internal resources (calculated over assets); STFIND short-term finance received from financial
institutions; LTDEBT long-term debt; FCOST cost external finance; PGROWTH and NGROWTH positive and negative
sales growth; CASH cash holdings level; RECEIV2 finance granted to customers (over assets); INVENT inventory; PURCH
purchases made. Results obtained by fixed effects estimation. Coefficients of time dummies not reported.
t-statistic in parentheses.
* significant at 90%; ** significant at 95%; *** significant at 99%
P-Breusch-Pagan is the p-value in Breusch-Pagan’s (1980) test. If the null hypothesis is rejected individual effects are
present in the data.
P-Hausman is p-value of Hausman (1978) test. If the null hypothesis rejected, only within-group estimation is consistent.
If accepted, estimation by random effects is the best option, since it is consistent and also more efficient than the within-
group estimator.

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230 International Small Business Journal 28(3)

and Jegers (1999), who only found a significant relationship with cash holdings, but consistent
with Chittenden and Bragg (1997) who showed a positive relationship between the trade credit
cycle and investment in working capital. The results obtained for the rest of the variables are con-
sistent with those reported in Table 5.
Industry structures may have important effects on payment terms because of different trade
credit cycles and different pricing policies. In fact, empirical evidence shows that trade credit terms
vary across industries but that there is little variation within industries (Ng et al., 1999; Petersen
and Rajan, 1997). Following this line of thought, all the estimations presented in Tables 3, 4, 5 and
6 were repeated in order to control for possible industry effects.9 We also introduced the economic
cycle, by using GDP growth. The results remain unaltered in both the sign and significance of the
variables.

Conclusions
Trade credit offered by suppliers is particularly important for SMEs, in view of the greater diffi-
culty they have in obtaining finance through credit institutions. Moreover, the level of trade credit
granted and received varies across different European countries. In this paper, the determinants of
the trade credit granted and received in a sample of European SMEs were studied. We have
attempted to determine whether factors that determine the level of trade credit differ among the
European countries.
In spite of the differences in the levels of trade credit in different countries, our results show that
the majority of explanatory factors of trade credit analysed are common across the range of European
countries studied. Most importantly, firms that have a greater capacity to obtain resources from the
capital markets, and serve this more cheaply, grant more trade credit to their customers. Indeed,
larger firms (which have better creditworthiness), with greater access to short-term financial
resources and cheaper external financing, finance their customers’ purchases more than smaller
firms. These results appear to support the theory that explains trade credit on the basis of suppliers’
advantages over financial intermediaries. However, the capacity to generate internal resources does
not affect all countries equally. Although the effect is positive for Finland, France and Greece, inso-
far as firms with greater capacity to generate internal funds grant more trade credit to their custom-
ers, in Belgium the relation is negative. In Spain, Sweden and the UK no relationship was found.
The use of trade credit as a way of transmitting information about the quality of the firm’s prod-
ucts does not appear to be confirmed in any of the countries. Firms with lower sales turnover
(products of higher quality), and smaller firms (less reputation), grant less trade credit to their cus-
tomers. But trade credit does represent an appropriate marketing mechanism. The results appear to
support the price discrimination theory, since we find that firms with higher margins grant more
trade credit. In addition, faced with a reduction in their sales, firms react by increasing the credit
they grant in an attempt to stem falling sales.
With regard to the accounts payable, we find that the larger European SMEs (superior credit-
worthiness), and those with more growth opportunities, receive more financing from their suppli-
ers. This type of finance also increases with a raised investment in cash holdings, trade debtors, and
inventories. In contrast, the existence of alternative financial resources leads to a reduced recourse
to financing from suppliers (substitution effect). It appears the European SMEs use less trade credit
when they have opportunities to obtain external financing at a lower cost, as well as when their
capacity to generate internal resources increases.
Our results reveal that trade credit decisions taken by firms are affected, in general, by the same
factors regardless the country in which they operate. The differences on accounts receivable and

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García-Teruel and Martínez-Solano 231

payable among European countries are mainly explained by the different terms of payment. It may
also be explained by the different financial market structures across nations (Berger and Udell,
2006). That conclusion is especially interesting for firms operating in different countries, since our
study shows the main factors they have to consider in order to establish their trade credit policy.
Moreover, firms established in countries belonging to the ‘continental’ model (Belgium, France,
Greece and Spain), which exhibit the highest levels of trade credit granted and received, have to be
particularly concerned with working capital management practices in order to reduce debtors’
credit periods (Peel and Wilson, 1996).
Finally, items of further research, when the required information is available, it would be interest-
ing to complete the study of accounts payable taking into account the quantity of credit offered to
the firms by their suppliers, as in the study by Petersen and Rajan (1997). Moreover, providing that
bank market power appears to be associated with more dependence on trade credit (Carbó-Valverde
et al., 2009), it would be useful to analyse their effects on the trade credit across countries. It would
also be interesting to evaluate whether there are differences in trade credit in countries with better
loan guarantee programmes which help SME to access bank debt (Nitani and Riding, 2005).

Acknowledgements
We acknowledge financial support from Fundación Séneca – Science and Technology Agency
from Region of Murcia (Spain) – (Program: PCRTRM 07–10). Reserch project 08822/PHCS/08.
We also acknowledge support from Fundación CajaMurcia. We appreciate the comments from the
two referees who have contributed to this paper.

Notes
1. For very many firms the database does not present the financial information that is required in our study.
2. Test for the difference in the mean between two specific countries (for example Belgium–Finland,
Belgium–France, Finland–France, etc.) also indicates that difference are significant in all cases. All
p-value = 0.00 are not presented.
3. European Payment Index is a report based on a written survey carried out by Intrum Justia in 25 European
countries on an annual basis involving several thousand companies.
4. Petersen and Rajan (1997) studied the accounts payable from two perspectives. They considered that
firms’ quantity of accounts payable depends on both the quantity of credit offered to them by their suppli-
ers, and on the quantity of credit that they themselves demand. The first aspect cannot be analysed in this
current work since we lack information about the dependent variable used by these authors (purchases
made on credit).
5. If endogeneity problems were considered, according to modern econometric modelling, the estimation
could be carried out using GMM (Generalized Method of Moments), which handles not only unobserved
heterogeneity, but also potential endogeneity.
6. This result is unchanged if we introduce a single variable to measure sales growth (both positive and
negative). Specifically, the sign of the estimated coefficient for that variable stays negative.
7. PCFLOW is calculated as the ratio of the resources generated internally (net profits plus depreciation) to
sales, when these resources are positive. NCFLOW is the ratio of the negative internal resources to sales.
8. We include CASH calculated as cash holdings over assets, RECEIV2 as finance granted to customers over
assets, and INVENT as inventory over assets.
9. As the analysis is carried out using the panel data methodology, the introduction of sectorial dummies is
not possible. Thus, to carry out these estimations (whose results are not presented because of their

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232 International Small Business Journal 28(3)

similarity), we considered that the turnover of assets and the investment in current assets were a sectorial
characteristic, so we subtract the sectorial mean from the variable TURN in model 1 and from the variable
CURRAS in model 2.

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PEDRO JUAN GARCÍA-TERUEL is associate professor of finance at the Faculty of Economics and Business,
University of Murcia (Spain). His current research interests include corporate finance and small business
finance.

PEDRO MARTÍNEZ-SOLANO is associate professor of finance at the Faculty of Economics and Business,
University of Murcia (Spain). His current research interests include corporate finance, small business finance,
and banking and international finance.

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