In recent years, the landscape of small and medium-sized enterprises (SMEs) has increasingly incorporated trade credit as an essential financial mechanism that drives sustainable profitability. A groundbreaking study by Zou and Zhou (2025) delves deep into the nuanced relationship between the scale of trade credit and the long-term profitability of SMEs, unearthing complex dynamics influenced by ownership structure, enterprise size, and industry-specific externalities. The findings reveal that while trade credit can be a powerful tool to foster growth, its effects are far from linear, exhibiting a critical inflection point beyond which benefits dissipate and risks amplify.
The theoretical groundwork posits that the inflection point, which demarcates the threshold where trade credit transitions from being beneficial to detrimental, fundamentally depends on firms’ risk tolerance levels. Enterprises with a greater tolerance for risk are naturally predisposed to sustain larger trade credit scales because their operational risk elasticity diminishes under increasing credit. This characteristic notably differentiates state-owned enterprises (SOEs) from their non-state-owned counterparts. SOEs, often backed by policy privileges and preferential access to finance, demonstrate superior risk absorption capabilities, thus supporting a higher optimal trade credit threshold before profitability wanes. Parallel reasoning applies to the dimension of enterprise size, where larger firms command stronger risk buffers and exhibit higher tolerance to trade credit scale expansions.
Empirical analysis presented in the study amplifies this conceptualization through a thorough heterogeneity assessment. Dividing SMEs into categories—state-owned and non-state-owned, as well as small, medium, and large based on asset size—the data confirm the hypothesized nonlinear relationship. Across most categories, trade credit exhibits an inverted U-shaped association with sustainable profitability. Intriguingly, SOEs consistently report higher inflection points than private or joint venture firms, suggesting that these organizations can leverage larger trade credit volumes while remaining profitable. Furthermore, as enterprises grow in total asset size, this optimal scale threshold systematically increases, underscoring a positive correlation between risk-buffering capacity and trade credit utility.
The study also ventures beyond firm-level analysis to investigate how industry-wide trade credit practices shape individual profitability, uncovering significant externalities. When multiple firms within the same industry concurrently escalate their trade credit scales, they generate interdependent effects that reshape competitive dynamics. Expanding trade credit ostensibly helps firms secure larger market shares by enabling downstream companies greater liquidity and competitive pricing. Yet this growth impinges on other firms’ survival through market share contraction, increased operational risk, and liquidity bottlenecks. Such interplay manifests in a U-shaped relationship where firms’ trade credit expansions both incentivize their peers to do likewise and compress overall profit margins once credit scales exceed certain thresholds.
Delving further into these spillover phenomena, the researchers conducted rigorous regression analyses substituting dependent variables with average trade credit scales and profit margins of peer enterprises within the same regional industry. Results crystalize a paradox: while firms’ credit expansion stimulates an upward spiral in industry-wide trade credit volume, it simultaneously depresses profit potential across the collective. Particularly alarming is the threshold identified—approximately $4.17 million USD—beyond which the deleterious impact intensifies, highlighting a largely unchecked proliferation of trade credit among over 70% of SMEs in the sample. This widespread oversaturation portends systemic risk, casting doubts on the long-term viability of such credit escalations without coordinated intervention.
The implications of these findings are profound and multifaceted. The research advances the discourse by emphasizing that the negative externalities linked to trade credit dynamics cannot be curbed solely by isolated firms. Rather, an industry-wide collaborative approach coupled with governmental oversight is paramount to internalize these spillover effects. Alarmingly, current regulatory frameworks remain silent on curbing trade credit scales despite their evident systemic consequences. Thus, the study advocates for the formulation of specific policies targeting trade credit scale management to preempt destabilizing market effects.
Turning attention to the micro-level mechanisms, the research illuminates two critical conduits through which trade credit influences profitability: leverage ratio and customer concentration. These mediating variables articulate how trade credit simultaneously bolsters and undermines firm performance. Initially, moderate trade credit facilitates sales expansion and profit growth, which manifests as a reduced leverage ratio—a metric of total debt over total assets. This reduction signals improved financial health and robust operational capacity. However, beyond a threshold, the escalating risks inherent in excessive credit—liquidity strain, administrative burdens, and inflexible production planning—reverse this trend, causing leverage ratios to climb. Elevated leverage compromises firm stability, deteriorates creditworthiness, and ultimately suppresses profit growth.
The second identified channel, customer concentration, adds another layer of operational complexity. Trade credit tends to deepen relationships with major buyers, increasing reliance on a narrow customer base. While this concentrated network can amplify sales through strengthened bonds, it also magnifies vulnerability to demand shocks and defaults. High customer concentration elevates operational risk, further compounding threats to sustainable profitability. The study’s regression results substantiate a U-shaped relationship between trade credit scale and customer concentration, with excessive trade credit pushing firms toward potentially precarious dependency scenarios.
Overall, Zou and Zhou’s research intricately weaves quantitative rigor with rigorous theoretical framing to present a compelling narrative on the double-edged nature of trade credit in SMEs. It delineates the fine line between leveraging credit for growth and succumbing to its overextension, with sharp variations observed across ownership types and enterprise sizes. Furthermore, by integrating externalities into the discussion, the study breaks new ground, compelling policymakers and business leaders alike to rethink the governance of trade credit within industry ecosystems.
This nuanced understanding is pivotal as SMEs constitute the backbone of many economies, driving innovation, employment, and GDP growth. Trade credit, long viewed primarily as a facilitative financial instrument, is now revealed as a delicate strategic lever requiring careful calibration. The findings urge a paradigm shift—encouraging entities to balance growth ambitions with disciplined risk management, industry-wide coordination, and vigilant regulatory oversight to safeguard long-term profitability and systemic resilience.
In conclusion, trade credit emerges as neither a panacea nor a mere risk factor; it embodies a dynamic force whose value hinges on measured deployment and contextual awareness. The study’s insights provide invaluable guidance for SMEs navigating competitive pressures and cash flow constraints in volatile markets. Policymakers would be well-advised to heed these warnings and design frameworks that foster sustainable credit practices, thereby supporting the vitality of the SME sector while mitigating the unintended reverberations of credit excesses across industries.
Subject of Research: Trade credit and sustainable profitability in small and medium-sized enterprises (SMEs), focusing on heterogeneity by ownership and size, externalities within industries, and mediating mechanisms such as leverage and customer concentration.
Article Title: Trade credit and sustainable profitability in small and medium-sized enterprises
Article References:
Zou, X., Zhou, L. Trade credit and sustainable profitability in small and medium-sized enterprises.
Humanit Soc Sci Commun 12, 531 (2025). https://doi.org/10.1057/s41599-025-04840-w
Image Credits: AI Generated
