The U.S. Small Business Administration (SBA) Office of Advocacy recently released a report detailing how small businesses use credit. The report, Bank Credit, Trade Credit or No Credit: Evidence from the Surveys of Small Business Finances, by Rebel A. Cole, compares firms that use credit with those that do not. The study also analyzes how businesses use different kinds of credit: bank credit (loans or lines of credit) and trade credit (from suppliers).

The overarching result: small firms that use no credit are significantly smaller, more profitable, more liquid, and have better credit quality; yet they hold fewer tangible assets. The study also finds that those firms that use credit are larger, and the amount of credit used as a percentage of assets is positively related to the firm’s liquidity. In addition, three-fifths of the small firms that use credit use trade credit.

The report found that many small firms use both types of credit at the same time. Businesses’ use of credit varies by industry, with firms using no credit found primarily in the service sector or wholesale and retail trade. Bank borrowing and trade credit is found more often in the manufacturing and construction sectors.

Furthermore, according to the study, firms that use trade credit tend to be larger and more liquid, but they also have lower credit scores. Small businesses that use bank credit are larger, younger, and less liquid. Companies that utilize neither bank nor trade credit are significantly smaller, more profitable, more liquid and of better credit quality.

For more information and a complete copy of the report, please click here.

To learn more about NSBA's efforts to improve access to capital for small businesses, please click here.