Customer relationships and the provision of trade credit during a recession

Abstract

Having a close relationship with a customer that accounts for a relatively high proportion of sales may be costly for small suppliers and weaken their bargaining power. Suppliers with a weak bargaining position may then find it difficult to reduce their provision of trade credit during a recession despite the need to do so. Employing Japanese small business data, we conclude that close customer relationships are in fact beneficial (not costly) for small suppliers in trade credit contracts. First, we find that small suppliers tend to offer less trade credit during a recession, even if the supplier–customer relationship is close. Second, notwithstanding a close supplier–customer relationship, we find that small suppliers offer less trade credit to their main customers if the supplier is in financial distress or charged higher interest rates by banks.

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