Commercial Trade Credit Expansion
RCTReview
Micro-entrepreneurs in informal urban markets are constrained from scaling sales and product lines because offering customer trade credit or custom pre-orders carries substantial short-run default and holdup risk when debt contracts require immediate installment payments.
Picture this
Think of a dressmaker who wants to allow customers to buy dresses on layaway or order custom gowns. Under a strict loan schedule, if a customer pays late, the dressmaker cannot pay her weekly loan bill and risks financial ruin; a deferred payment schedule gives her enough time to survive delayed customer payments and capture larger orders.
What the evidence says
Borrowers with a two-month grace period were 11.3 percentage points more likely to sell to customers on credit (43.2% control vs 54.5% treatment, p < 0.01), 10.7 percentage points more likely to accept customer pre-orders (39.5% control vs 50.2% treatment, p < 0.01), and offered 6.05 additional types of goods and services (p < 0.05).
- Who was studied
- N = 769 microenterprises surveyed 3 years post-disbursement in Kolkata, India.
- How
- Field Randomized Controlled Trial evaluating multi-year microenterprise business practices and customer financing policies across loan contract arms.
What to do
Extend microfinance repayment start dates by 8 weeks for retail vendors who agree to offer trade credit and expanded product offerings to their client base.
From the source
"Relative to regular clients, they were more likely to extend credit to customers through loans and pre-orders and to offer a wider array of goods and services."
101_290 microfinance and entrepreneurship AER2013.pdf