Small Firms That Don't Use Credit More Profitable, Study Finds
More profitable, more liquid and having better credit quality are a few of the traits of smaller businesses that do not use credit, a SBA Office of Advocacy study revealed.
Released in June, the Bank Credit, Trade Credit or No Credit: Evidence from the Surveys of Small Business Finances report compared firms that use credit (leveraged) with those that do not (unleveraged). The study also looked at which kind of credit leveraged firms use bank credit such as loans or lines of credit, trade credit from suppliers or both. Credit unions were not examined.
The study found that bank credit and trade credit used by small firms are complements, with many of them using both types of credit simultaneously. The data also showed that larger businesses tend to use credit and the amount used as a percentage of assets is positively related to the firm's liquidity. Those that used bank credit were larger businesses, younger and less liquid.
Smaller businesses, defined as those with fewer than 500 employees and mainly those having fewer than five, had stronger profits but fewer tangible assets. These firms were more likely in the service, wholesale and retail trade industries. Bank borrowing and trade credit was found more often in the manufacturing and construction sectors. Firms that used trade credit were larger, more liquid, of worse credit quality, and less likely to be a firm that primarily provides services, the survey showed.