A Review of Impact of Trade Credit on Firm’s Profitability: A Study of Non-financial Firms in Pakistan

Abstract

Business plays an important role in economic growth, which increasingly draws public attention in recent decades. Previous literature discusses the reasons why the companies offer and receive trade credit. However, it lacks empirical evidence to confirm the relationship between trade credit and profitability. This work focuses on how trade credit, from both the supplier side and the demand side, influences the profitability of SMEs. We investigated 100 firms to establish a long-term relationship with their suppliers to gain credits since accounts payable is positively related to the profitability. Meanwhile, I find that there is no clear relationship between accounts receivable and profitability.

Keywords: Trade credit Accounts revivable Accounts Payable Profitability SMEs Transaction theory