How Local Finance and Enforcement Shaped SME Credit Choices before and during the COVID Crisis

Abstract

Credit from suppliers is an important source of finance for firms. It can sustain firms’ financial flexibility even in periods of downturn. In this study, using a large database of 90,763 Italian firms in the 2015–2021 period, we investigated how local financial development affects the trade-credit policies of SMEs and how this effect is conditioned by the degree of judicial enforcement. Given that trade credit can be a substitute for bank financing, we find that firms make more use of trade credit in developed financial markets. Moreover, we highlight the finding that a higher degree of judicial enforcement, which reinforces the role of contracts in the market, amplifies this effect. Finally, we observe that the COVID-19 crisis has reduced both the positive effect of local financial development and the positive moderating effect of enforcement in the use of trade credit.