The Lender’s Lender: Trade Credit and the Monitoring Role of Banks

Kayla Marie Freeman

♦ A firm’s role as lender to its customers (via trade credit) is influenced by the firm’s own lenders. With a novel dataset of trade credit between U.S. public companies, I find that firms limit customer credit concentrations, extending less generous trade credit to customers as the firm’s sales dependence on them increases. Evidence points to lenders influencing firms to limit credit concentrations: First, cross-sectional variation shows stronger results with greater lender monitoring intensity. Second, analysis of granular loan contract details reveals that concentration limits in borrowing base formulas are a clear, previously unexplored way banks influence trade credit policies.

Read it here.