Trade Credit and Profitability in Small and Medium Enterprises

Small and medium enterprises (SMEs) play an important role in economic growth, which increasingly draws public attention in recent decades. Previous literature discusses the reasons why SMEs offer and receive trade credit. However, it lacks empirical evidence to confirm the relationship between trade credit and profitability. This paper focuses on how trade credit, from both the supplier side and the demand side, influences the profitability of SMEs. We investigate 71 SMEs in Netherlands from 2009 to 2013. The findings suggest that SMEs can establish a long-term relationship with their suppliers to gain credits since accounts payable is positively related to the profitability. Meanwhile, I find that there is no clear relationship between accounts receivable and profitability.