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The value of trade credit under risk controls

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  • Xu Chen
  • Lian Qi
  • Zuo-Jun Max Shen
  • Ye Xu

Abstract

Trade credit is widely used by companies to obtain external funds. The extant literature has demonstrated that trade credit benefits the buyer and the supplier in multiple ways, but might still induce various issues. In this paper, we focus on the impact of trade credit on growing small businesses and their suppliers. By looking into a one-supplier-one-retailer supply chain under a multiple-period setting, we study the expansion and inventory policies of the retailer with his consideration of risk control, which is critical for any small business. We also take into account the supplier's risk control decision on whether trade credit will be extended. We further numerically mimic various growth scenarios of the retailer. Interestingly, we find that, in contrast to the traditional wisdom, trade credit offered by the supplier not only increases the profits of both parties, but also reduces the retailer's default risk, as long as the supplier can apply appropriate risk controls. In addition, we show that offering trade credit does not necessarily attract retailers to act aggressively in general. Under the supplier's risk controls, the retailer's growth rate can be quite insensitive with the term of trade credit.

Suggested Citation

  • Xu Chen & Lian Qi & Zuo-Jun Max Shen & Ye Xu, 2021. "The value of trade credit under risk controls," International Journal of Production Research, Taylor & Francis Journals, vol. 59(8), pages 2498-2521, April.
  • Handle: RePEc:taf:tprsxx:v:59:y:2021:i:8:p:2498-2521
    DOI: 10.1080/00207543.2020.1735657
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    Cited by:

    1. Wu, Xuanyu & Yang, Min & Liang, Liang, 2024. "Government should be merciful or strict: Penalizing defaulting suppliers in emergency supply chains," Socio-Economic Planning Sciences, Elsevier, vol. 92(C).
    2. Xie, Xiaofeng & Chen, Xiangfeng & Xu, Xun & Gu, Jing, 2024. "Financing a dual capital-constrained supply chain: Profit enhancement and diffusion effect of default risk," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 181(C).
    3. Gaoke Wu & Bo Feng & Libin Guo, 2021. "Optimal Procurement Strategy for Supply Chain with Trade Credit and Backorder under CVaR Criterion," Sustainability, MDPI, vol. 13(18), pages 1-16, September.
    4. Bi, Gongbing & Wang, Pingfan & Wang, Dujuan & Yin, Yunqiang, 2021. "Optimal credit period and ordering policy with credit-dependent demand under two-level trade credit," International Journal of Production Economics, Elsevier, vol. 242(C).
    5. Sun, Shuxiao & Hua, Shengya & Liu, Zhongyi, 2024. "Navigating default risk in supply chain finance: Guidelines based on trade credit and equity vendor financing," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 182(C).

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