Bank vs. Trade Credit Financing:
Financing Sources on the Optimal Number
of Suppliers1
Volodymyr Babich
In
countries where monetary institutions are scarce, trade credit (supplier loans)
might be the only recourse for financing firm's operations. In countries with developed financial
markets, firms can access various sources of short-term financing, including
bank loans and trade credit. Using a
one-period model, which combines operational and financial decisions, we study
how financial constraints, trade credit and bank loan terms, wholesale and
retail prices, fixed costs affect supplier selection. As one would expect, the model suggests that
the firm should use more suppliers if the bank financing is scarce.
Surprisingly, we also find that the trade credit limit and the wholesale price
affect the optimal number of suppliers for a firm in a non-monotone way.
1 This is joint work with Goker Aydin, Pierre-Yves
Brunet, Jussi Keppo and Romesh Saigal.