Trade Credit as an Option to Acquire Financing

Abstract

We study joint operational and financing decisions of a cashconstrained manufacturing firm in the presence of bank financing and trade credit, where banks set credit limit based on borrowers repayment histories. Trade credit financing enables the manufacturing firm to build credit history, which affects bank financing availability in the future periods. This can make trade credit valuable, even though it is costly in the current period. We quantify the value of trade credit as a way of securing access to future bank financing and investigate how financing considerations distort the firm’s operational decisions.