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Surviving chapter 11: Why small firms prefer supplier financing

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Abstract

This research examines the value of trade credit relationships for small firms. We initially document the benefits of trade credit relationships and_explain why small firms in financial distress tend to prefer trade credit from suppliers over bank financing. Banks do not agree to debt reduction, additional financing, or deviate from absolute priority. Implicitly, banks’ interests are best served by forcing liquidation through Chapter 7. Secured suppliers with pre-petition debt tend to provide debtor-in-possession financing, while unsecured suppliers are more likely to agree to deviations from absolute priority. Hence, suppliers’ interests are best served by facilitating reorganization through Chapter 11.

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Authors and Affiliations

  1. College of Charleston, 29424, Charleston, South Carolina

    Jocelyn Evans (Associate Professor)

  2. Moore School of Business, University of South Carolina, 29208, Columbia, S.C.

    Timothy Koch (Professor)

Authors
  1. Jocelyn Evans
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  2. Timothy Koch
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Evans, J., Koch, T. Surviving chapter 11: Why small firms prefer supplier financing. J Econ Finan 31, 186–206 (2007). https://doi.org/10.1007/BF02751642

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