The Small Business Administration (SBA) released a study that examines the types of credit used by small businesses, namely bank credits (loans or lines of credit) and trade credits (from suppliers). The study compares companies that use credit (leveraged) with those that do not (unleveraged).
The report found that the two types of credit are complements, with many small firms using both types simultaneously. The study also found that small firms that use no credit are significantly smaller, more profitable and have better credit quality, but hold fewer tangible assets. Firms that use credit tend to be larger, and the amount of credit used as a percentage of assets is positively related to the firm’s liquidity.
Trade credits are used by about 60% of the leveraged firms. Credit use varies by industry. Firms avoiding credit are generally associated with the service and retail sectors, while the manufacturing sector is more likely to borrow bank loans or use trade credits.
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