Trade credit versus bank credit: a simultaneous analysis in European SMEs

Trade credit and bank credit constitute two of the most important external sources of finance for small firms. The purpose of this paper, first and foremost, is to explore the complementary or substitutive relationship between trade credit and bank credit by considering the joint determination of both resources on small and medium-sized enterprises (SMEs), and second, it analyses how the country institutional factors affect these two resources. Specifically, we introduce the efficiency of the legal system and the development of the financial sector. For the empirical analysis, we use a simultaneous equations model across a sample of 60,377 SMEs operating in 12 European Union countries over the period 2008-2014. The results suggest that two resources, trade credit and short-term bank credit, are simultaneously determined and negatively related in SMEs. The results also suggest that trade credit and bank credit depend on country institutional factors.