From The Conversation
Operating a small business, the backbone of the U.S. economy, has always been tough.
But they’ve also been disproportionately hurt by the Great Recession, losing 40 percent more jobs than the rest of the private sector combined.
Interestingly, as my research with Harvard’s Ramana Nanda shows there’s a fairly straightforward way to support small businesses, make them more profitable and hire more: pay them faster.
A major source of financing
When a business is not paid for weeks after a sale, it is effectively providing short-term financing to its customers, something called “trade credit.” This is recorded in the balance sheet as accounts receivable.
Despite its economic importance, trade credit has received little attention in the academic literature so far, relative to other sources of financing, yet it is a major source of funding for the U.S. economy. The use of trade credit is recorded on companies’ accounting statements as “trade payables” in the liability section of the balance sheet. According to the Federal Fund Flows, trade payables amounted to US$2.1 trillion on nonfinancial companies’ balance sheets at the end of the third quarter of 2006, two times more than bank loans and three times as much as a short-term debt instrument known as commercial paper.
Read the Full Article at The Conversation
Jean-Noel Barrot is an Assistant Professor of Finance, MIT Sloan School of Management