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Friday, November 4, 2005

Study: Trade credit in Canadian firms

1988 to 1998

A new study that investigates the role of trade credit in the economy has found that medium-wealth firms substitute trade credit for bank credit, and that these firms appear to benefit most from this substitution.

Trade credit refers to credit granted by a supplier to its customers. It is often identified as an important source of short-term finance for many firms. Economists have suggested that trade credit often acts as an imperfect substitute for bank credit for firms that are rationed in their access to bank credit. Credit rationing is believed to primarily affect firms with good investment projects by preventing them from fully borrowing against those opportunities.

This study used the balance sheets of a sample of over 28,000 Canadian firms covering the period 1988 to 1998 to examine the relationship between trade credit and bank credit as a way to test for credit rationing. Firms in the sample were split into categories based on their profit performance to test whether firms with different performance characteristics appeared to face different degrees of credit rationing.

The findings showed that firms categorized as medium-wealth based on their profit levels appeared to be treating trade credit as a substitute for bank credit.

The research paper Trade Credit and Credit Rationing in Canadian Firms, no. 36 (11F0027MIE2005036, free) is now available online. From Our products and services page, under Browse our Internet publications, choose Free, then National accounts.

More studies on small-firm financing are available free of charge in the analytical series Update on Economic Analysis (11-623-XIE) on our Web site.

For more information, or to enquire about the concepts, methods or data quality of this release, contact Rose Cunningham (613-782-7852) or Guy Gellatly (613-951-3758), Micro-economic Analysis Division.



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Date Modified: 2005-11-04 Important Notices