Trade credit and relationships

Exploiting transaction-level international trade data, this paper documents that long-term firm-to-firm relationships facilitate the use of trade credit, with the strength of this effect varying with firm size, firms’ payment delays, and multinational affiliate status. Effects also depend on the strength of contract enforcement across countries and the complexity of products traded. Because trade credit can reduce the overall need to borrow from the financial sector, long-term relationships may reduce firms’ credit demand. The destruction of trade relationships, for example, through trade conflicts, may hence increase firms’ leverage.