55. Trade credit and corporate profitability: Evidence from EU-based SMEs

Silva, S. (2025). Trade credit and corporate profitability: Evidence from EU-based SMEs. Journal of Corporate Accounting and Finance, 36(1), 81–92. https://doi.org/10.1002/jcaf.22741This paper investigates the impact of trade credit on the profitability of EU-based SMEs between 2012 and 2019, using accounts receivable as a proxy for trade credit. Results reveal an inverted U-shaped relationship: profitability rises with trade credit up to an optimal point, after which excessive credit harms performance due to risks like payment delays, defaults, and missed supplier discounts. This pattern is evident mainly in firms with low financial flexibility—those with high leverage and low cash reserves—where deviations from the optimal level reduce profitability and strain liquidity. In contrast, highly flexible firms show no such pattern, likely due to stronger bargaining power. The relationship is most pronounced in basic industries, manufacturing, and transportation, while sectors like retail, wholesale, and services show no significant non-linear effects. Based on data from 182,050 firm-year observations, the study underscores trade credit as a key financial decision requiring careful balance between sales growth and risk exposure.