We investigate the effect of close customer relationships on small firms' provision of trade credit during the 2001-2003 recession in Japan. Many studies argue that close customer relationships are costly for suppliers because when their main customer has a high proportion of the firm's total sales, suppliers cannot easily find alternative customers. As a result, the supplier's bargaining position is weaker. Then suppliers that depend largely on their main customer cannot easily reduce their provision of trade credit, despite the need to do so during a recession. The results in our paper indicate that close customer relationships are not costly for suppliers in trade credit contracts. First, small businesses offer less trade credit, even if the proportion of sales to their main customers is high. Second, suppliers offer less trade credit if they are in financial distress and charged higher interest rates by banks, even when they are dependent on their main customers. Third, highly leveraged dependent suppliers reduce trade credit, unlike highly leveraged independent suppliers. This implies that dependent suppliers can cut back on trade credit in the presence of leverage. These findings imply that close customer relationships are beneficial for suppliers.
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