Research On The Sustainability Of Trade Credit During Financial Crisis Based On The Theory Of Alternative Financing

The explosion of 2008 global financial crisis brought great damage to the world’s economy, during which not only did consumption decrease and bad debts increase in commodity market, but also bank loan standard was raised and investment scale by shareholders was deducted in capital market. In such desperation, many enterprises suffered the risk of bankruptcy and turned to trade credit for silver lining, by attempting to gain as much trade credit as they can to obtain more abundant liquidity, thus reducing their financial risks. But would it really work? Using a sample of empirical data from 2004 to 2012 of A-share listed companies in China, this paper tends to analyze the impact the crisis had on said companies. This paper sorts year 2008-2012 as the financial crisis period since it appears to suffer more explicit damage through analysis. This paper will be focusing on how trade credit reacted to financial crisis, and how Alternative Financing Theory would explain the situation. Moreover, based on previous researches, we come up with a more comprehensive definition method for trade credit. Meanwhile, the paper innovatively takes a peek at the relationship between trade credit and property rights. The research methods taken in this paper consist of qualitative analysis, descriptive statistics, regression analysis and case study. Qualitative analysis aims to put forward hypotheses on the basis of some classical theories on trade credit. Meanwhile, it also helps interpreting the empirical results and the real case. Descriptive statistics tends to describe the state and change of bank loans and trade credit of A-share listed companies. It involves of several important measures. In the section of regression analysis, this paper constructs correspondent linear multivariate regress equations on the basis of hypotheses. The purpose of case study is not only to prove the conclusions reached from regression analysis, but also to extend the research to suggest some effective countermeasures for enterprises to release the adverse influences of financial crisis.The regression analysis ends up with a series of constructive conclusions. Firstly, during financial crisis, the market worried about the solvency of financial institutions, reluctant to provide financing, resulting in Banks’liquidity shortage. At the same time, product sales went through serious difficulties and profit dropped sharply, leading to massive deduction, restructuring and bankruptcy of enterprises, which was a concern for banks surely. As fear of crisis spread, lack of liquidity became the main factors of financial markets, causing banks to raise loan threshold. Chinese listed companies could barely get enough bank loans and the situation was worsening as the crisis deepened.Secondly, as the impact of financial crisis continued to deteriorate, companies’ net trade credit reduced instead. During financial crisis, many enterprises were on the brink of bankruptcy, needing of survival coming before making profit, which left ample liquidity becoming the most important issue. Therefore, enterprises tend to try every means to maximize their net trade credit. However, in the period of financial crisis, money was quite tight for most companies, especially for small companies. As a result, relying on trade credit too heavily cannot sustain.Besides, companies of higher debt ratio, lower return on assets, less cash holdings, and less cash flow tend to face greater financial risk. Although the demand for trade credit should be more urgent in less performed companies, their customers and suppliers were relatively pessimistic about their prospects and financial crisis would further accelerate this pessimism, making it harder for said companies to gain trade credit. As we all know, State-owned companies usually have strong anti-risk and solvency guaranteed abilities in China, because government would offer preferential policy once they are faced with operational or financial dilemma. Undoubtedly, creditors would prefer state-owned companies to non-state-owned ones when it comes to offering trade credit help, which means that non-state-owned companies were left with less and less trade credit. As a result, despite of the deterioration of financial crisis, trade credit obtained by enterprises with worse financial situation or non-state-owned actual controller will decrease gradually.Finally, bank loans and trade credit are two essential sources of funds for enterprises. Since bank loan was difficult to attain during financial crisis, according to "Alternative Financing Theory", companies would increase the level of trade credit, and the harder the obtainment of bank loan, the higher the net trade credit. Ironically, it is a tendency that resources float to better equipped and better performed companies. Those non-state-owned companies with weaker market power and poorer financial conditions could hardly utilize trade credit. That means, this paper would get the conclusion that the alternative relationship between bank loan and trade credit is weakened during financial crisis. All in all, trade credit which implies a redistribution of the supply chain is equilibrium under the combined action of supply and demand. The financing support during financial crisis trade credit could provide was rather temporary than permanent.Besides the above conclusions reached from regression analysis, case study of Ya Bao brings familiar results and some other enlightenment that is the countermeasures to financial crisis. This research has an important guiding significance in business practice. Firstly, enterprises should invest more in R&D in normal economic period. Strong skills of R&D can provide more new products, which will enlarge the company’s market. Sales are the life of a corporation, which is also the most effective safeguard against financial crisis. Secondly, it is wise of enterprises to increase monetary fund holdings and raise the proportion of liquid assets during the financial crisis. More liquid assets can guarantee the capacity to pay matured debts. Thirdly, enterprises should try their best to increase stockholders’equity and reduce financial leverage. Reducing the profit distribution and encouraging stockholders to invest are both measures to increase of Shareholder s’ equity.All in all, trade credit, which may appear due to various causes, can provide capital for enterprises in short term rather than long period. The enterprise should not rely too heavily on trade credit even it is short of bank loans. To release the impact of financial crisis, some other effective measures are put forward in this paper.