Mid Sweden University

Purpose– The purpose of this paper is to examine the impact of trade credit as a funding source on profitability among small and medium-sized enterprises (SMEs).

Design/methodology/approach– A large cross-sectional panel data set covering 15,897 Swedish SMEs in five industry sectors from 2009 to 2012 was analysed using several statistical techniques.

Findings– The study provides empirical evidence that the use of trade credit significantly and negatively affects firm profitability, indicating that SMEs with lower accounts payable are more profitable. Furthermore, liquidity level and firm size are positively related to profitability, while firm age is negatively related to profitability.

Practical implications– If firms rely, or are forced to rely, too heavily on accounts payable as a funding source, their long-term profitability could be jeopardized. An efficient financing policy should make the costs related to the use of trade credit more transparent. Thus, firm managers could explicitly use trade credit agreements with their suppliers to control the costs related to this particular financial source.

Originality/value– To the authors’ knowledge, this study is the first to focus on the impact of trade credit on profitability in the Swedish context, where SMEs are encouraged to use trade credit as a funding source. In addition, the study is based on an extensive sample of SMEs across several industry sectors.