Business Trade Credit Management: Motives and Practices

• Main Authors: Pike, Richard, CHENG, Nam Sang
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 1996
• Subjects: Accounting; Corporate Finance
• Online Access: https://ink.library.smu.edu.sg/soa_research/558
• Institution: Singapore Management University

Trade credit is an essential element of business life for most firms; yet, until recently, scant attention has been paid by the academic community to this important topic. The question is addressed in this paper concerns its very existence: Why is trade credit offered by firms? The paper reports part of a CIMA funded study into trade credit management practices in large UK companies and focuses on the various motives for offering trade credit to customers. Various economic and other theories in the literature are reviewed and a number of propositions forwarded on the motives for extending trade credit. The main motives examined are (1) to aid the marketing/sales decision, (2) to invest in long-term selling opportunities, (3) to aid the financing of purchases, and (4) to create cost and operating efficiencies. The results of a survey to credit managers in 100 large UK firms on their agreement on the appropriateness of the motives generated from the literature is analyzed and a number of factors are produced. Finally, tests of association are conducted to suggest which factor motives have greatest impact on the various credit practices, such as the credit period extended.