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Trade Credits and Bank Loans for SMEs in the Textile Sector

Abstract We investigate the relationship between trade credits and bank loans for on average 493 Turkish SMEs in the textile sector. Our study period extends from the year 1997 to 2005, totaling 1973 observations. The results indicate, interestingly, a non-linear relationship between trade credits and bank loans. Specifically, at low levels of trade credits, bank loans increase with the rise in trade credits, confirming the complementing argument. Whereas at higher levels of trade credits, by corroborating the substitution argument, banks become reluctant to grant external finance to firms. Moreover, we do not detect that outside and domestic financial crises alter the pattern of the non-monotonic relationship. Furthermore, while firm size, firm age and foreign sales have a positive impact on bank loans, profitability has a fairly adverse influence. Finally, we find a modest speed of adjustment to target bank loans for the firms.