Disentangling the Intention to Use Trade Credit in Family SMEs: The Influence of Knowledge and Signals

Abstract

Trade credit is one of the primary sources of short-term financing, especially in family firms. However, trade credit can be expensive, with an implicit annual interest rate exceeding 40 %. From a theoretical point of view, cheaper short-term bank debt should then be preferred above trade credit. Surprisingly, the overall use of trade credit exceeds, by far, the use of short-term bank credit. Therefore, we investigate the antecedents of the intention to use expensive trade credit. Relying on the theory of honest incompetence, we argue that the CEO's knowledge of trade credit determines the intention to use it. Additionally, we argue that even when the CEO is aware of the high costs related to trade credit, expensive trade credit may still be used in order to prevent sending negative signals towards the supplier. Our analysis, based on a sample of Belgian family SMEs, shows that knowledge of the cost of trade credit indeed negatively influences the intention to use trade credit.