The Role of Trade Credit During the Covid Crisis - A study on Swedish SMEs' use of trade credit as a financial aid and its role as a substitution to bank financing

Abstract: The Covid crisis has introduced substantial uncertainties for SMEs, making them more vulnerable. Our study investigates Swedish SMEs' use of trade credit, both received and extended, as a medium for the mitigation of financial distress during the crisis. Furthermore, we study the existence of a substitution effect and its magnitude change in the presence of a crisis. We have found that both receiving and extending trade credit has a negative relationship with SME financial distress, and this negative relationship with financial distress has been observed for the net extension of trade credit as well. Nevertheless, no significant direct impact from Covid was found. Our study also found evidence to support the existence of a substitution between bank financing and trade credit during the studied period. This effect was however weakened during the crisis.