Journal of Business Finance & Accounting vol:33 issue:1-2 pages:305-328
Business start-ups provide an excellent opportunity for testing various hypotheses on why firms use trade credit. At the time of start-up, failure risk and financial constraints are typically large. Also, start-ups have no established relationships with banks and suppliers. The literature has related all these features to trade credit use. Moreover, as firms grow older, these characteristics become less pronounced, allowing its to test the dynamics of trade credit use. We find that start-ups use more trade credit when financial constraints are large, when suppliers have a financing advantage over banks in financing high-risk firms, when entrepreneurs value private benefits of control and when transaction costs are important. Furthermore, the dynamic implications of these theories are supported.