Trade credit and sustainable profitability in small and medium-sized enterprises

The existing literature has examined both the positive and negative effects of trade credit but has not integrated these two effects into a unified framework, making it difficult to determine how firms should manage their trade credit. To address this issue, the paper uses risk-adjusted returns to measure sustainable profitability and empirically analyzes the impact of trade credit on sustainable profitability for small and medium-sized enterprises using data from listed companies. The study finds that the scale of trade credit has an inverted U-shaped relationship with sustainable profitability, with the optimal trade credit scale ranging from $380,000 to $930,000 on average. Furthermore, an increase in the proportion of trade credit with an aging period of less than one year positively impacts sustainable profitability, while an increase in the proportion of long-term trade credit harms sustainable profitability. Further analysis reveals that for state-owned enterprises and larger firms, the turning point for the impact of trade credit scale on sustainable profitability occurs at a higher trade credit scale. In addition, the paper investigates the externalities of trade credit and finds that once a certain threshold is reached, an increase in a firm’s trade credit scale leads to a higher trade credit scale among peers in the same region and industry, while reducing their profitability. This finding fills a gap in existing research in this area. Mechanism tests indicate that excessively large trade credit scales significantly increase a firm’s leverage and customer concentration, thereby jeopardizing sustainable profitability.