Trade credit, payment duration, and SMEs’ growth in the European Union

Long payment durations are commonly considered a major drag on small- and medium-sized enterprises (SMEs) growth by public policies and practitioners. At the same time, long payment durations mean that customers have more time to assess to product quality, which reduces information asymmetries and thus facilitates the establishment of strong business relationships. Building on these conflicting views, we investigate the relationship between payment duration and two dimensions of firm growth, namely growth in sales and growth in employment. Our results, based on a large sample of SMEs located in the European Union, show a positive relationship between payment duration and growth. Moreover, we observe that in countries characterized by a strong quality of payment conditions, the positive relationship between payment duration and growth is amplified. We interpret our findings as evidence that SMEs, by accepting long payment durations, act positively upon their ecosystem by facilitating other SMEs financing conditions, thus creating a “virtuous cycle” in environments characterized by supportive institutional context.