Trade credit is lending credit to customers which is linked to sales of product. It is very important in small business finance. In this small companies either lend credit to their customers or use the credit provided by their suppliers, or both. Because of its dual nature disruptions arise, leading to slow demand throughout the entire supply chain. Hence the trade credit system acts as an important window to know what is happening to small businesses. Small business trade credit had been adversely affected by the financial crisis.
Many small businesses are found to be more dependent on trade credit. According to the Federal Reserve Survey on finances of small businesses, in 2003, 60.1 percent of small businesses were found to use trade credit. Another survey conducted at the end of 2009, by Gallup Organization for the National Federation of Independent Business (NFIB) Research Foundation, stated that 65 percent of small businesses gave trade credit to their customers.
National Association of Credit Managers conducted a monthly survey on 1000 trade credit mangers. It showed that the trade credit rate dropped because of recession. 29 percent of small business owners responding that during they tightened trade credit and 7 percent said they eliminated it, while only 5 percent said they had loosened it, during the year 2009. Further, 27 percent of the small business owners said that their suppliers had tightened credit and only 1 percent reported suppliers loosened it.
Additional data showed that the trade credit was reviving, the statistics shows that it was low in March 2009, but it was seen climb up in March 2010.