Trade Credit, Quality Guarantees, and Product Marketability

Abstract

Although trade credit has long been an important source of financing for corporations, it is one of the least understood methods of doing business. One possible reason for misconceptions about trade credit is that it is not primarily financial in nature, but instead reflects production and marketing decisions. In this paper, we consider trade credit as a way that firms can guarantee product quality, rather than as a means of financing less creditworthy firms. In this context, we seek, and provide, possible explanations for observed phenomena such as relatively shorter (or no) trade credit terms for consumer and food products and relatively longer terms for heavy industrial equipment.