Does access to bank credit affect the nexus between trade credit and firm investment decisions? Empirical evidence from Italian SMEs

We investigate whether a company that accurately manages its trade credit channel can increase corporate investments, especially during crisis periods, in weak bank-firm relationships (i.e., young, more distant, and fewer credit relationships), and under bank credit constraints. We exploit a unique and proprietary panel dataset comprising 5,145 Italian SMEs operating with 99 cooperative banks over the period 2008-2014. Firstly, our findings confirm the significant effect of the trade credit channel on the growth rate of SME investment. Secondly, when we investigate the effect of the trade credit channel during and outside periods of financial distress, we show that, in emergencies, the decreased supply of bank credit pushes SMEs to turn to trade credit as the most important alternative source of external financing to bank lending. Thirdly, we show that shorter and more distant firm-bank relationships and a smaller number of banking relationships lead to increased reliance on the trade credit channel to finance firm investments. Further, our findings suggest that the influence of the trade credit channel on firm investment behavior is more pronounced for firms facing greater bank credit constraints. Our empirical findings suggest that policymakers should strengthen trade credit as a vital alternative funding source, both through traditional banking products (e.g., factoring) and innovative fintech solutions (e.g., using artificial intelligence to predict late invoice payments).