The report explores the dynamics of trade credit, focusing on how firms with weaker bargaining power and more financial constraints are disproportionately affected in trade credit negotiations. The research highlights significant findings related to trade credit provision in emerging markets, using empirical data from the Polish corporate sector.

Introduction

The report delves into the role of trade credit in emerging economies, highlighting how companies use it as a tool to alleviate financing constraints. Trade credit is often perceived as a redistributive mechanism that allows financially stronger firms to provide credit to those with limited access to external financing. However, the research challenges this narrative by showing that trade credit is often a negative-sum game for firms with weaker bargaining power.

Empirical findings

The empirical analysis is based on data from Polish firms between 1997 and 2014. The report reveals that suppliers of trade credit tend to be smaller, younger, and more financially constrained than the beneficiaries. These suppliers increase trade receivables at the expense of profitability, with constrained firms seeing a 0.118 unit decline in profit margins for each increase in trade receivables. In contrast, firms receiving trade credit generally have better access to external financing and experience no significant improvements in their operational key performance indicators (KPIs).

One critical finding is the disparity in asset turnover and liquidity. Suppliers of trade credit improve their asset turnover ratio by 1.677 units, but this comes at the cost of operating profitability. Beneficiaries, on the other hand, enjoy higher liquidity, with an increase of 0.697 units in cash holdings relative to suppliers, yet their profit margins remain largely unaffected.

Trade credit as a negative-sum game

The report argues that trade credit bargaining in emerging economies often results in inefficiencies, particularly for financially constrained suppliers. Companies forced into trade credit arrangements due to their weak bargaining position experience a deterioration in operating performance. In contrast, the beneficiaries of trade credit, who are often larger and more financially stable, show no substantial gains in profitability or growth, suggesting that trade credit negotiations may benefit neither party.

This dynamic is particularly evident when looking at the return on assets (ROA) for suppliers of trade credit, which show a cumulative negative impact. Despite improving asset turnover, constrained firms are unable to translate this into meaningful profit, indicating that trade credit serves more as a burden than a benefit for these firms.

Policy implications and recommendations

The report calls for regulatory action to mitigate the predatory use of trade credit. Recommendations include:

• Limiting payment delays: Policies should be put in place to prevent larger firms from exploiting smaller companies through prolonged payment periods.
• Legal frameworks for trade credit: The development of stronger legal protections for firms supplying trade credit, including mechanisms for securitising receivables and offering government-sponsored financing for constrained companies.
• Collateral for trade credit: Encouraging the use of collateral in trade credit transactions to protect financially constrained suppliers and reduce the risks associated with credit provision.

Conclusion

In summary, the report provides crucial insights into the uneven dynamics of trade credit in emerging markets. The findings suggest that trade credit, instead of fostering growth for constrained firms, often exacerbates their financial difficulties. The policy recommendations provided aim to create a more equitable trade credit landscape, reducing the negative impacts on smaller, financially constrained firms while ensuring that larger firms do not exploit their weaker counterparts.