Trade credit and corporate profitability: Evidence from EU-based SMEs

Abstract

This study provides empirical evidence about the impact of granting trade credit to customers on the profitability of EU-based SMEs over 2012–2019. Results show an inverted U-shaped relationship between corporate performance and trade credit – proxied by receivables, meaning a positive relationship between creditors and customers for low levels and a negative relationship for high levels of trade credit. This evidence is concentrated on firms with less financial flexibility, for which any deviation from the maximum point of investment in trade credit represents a negative impact on its performance due to payment delay or even a default event. Results are robust to potential endogeneity issues.