Abstract:
Trade credit is one of the main sources of funding for global companies. The
importance of trade credit can also be seen from the proportion of investment that is
financed through it. Despite the potential importance of trade credit, limited attention
has been paid to its role and use, especially in developing countries. The main aim of
the study was to establish the determinants of trade credit and moderating role of the
age of the firms listed in Nairobi securities exchange. The study specifically
determined the effect of debt levels, collateral, liquidity and inventory on firm trade
credit. The study further determined the moderating effect of firm age on
determinants of trade credit. The study was guided by both the transaction cost and
the credit substitution theories and adopted an explanatory research design. The study
was based in firms listed on the Nairobi securities exchange for the period 2012 to
2013 and used document analysis to collect secondary data from the company’s
annual report. Data were analysed through the use of descriptive statistics such as
means and standard deviation while inferential statistics methods included correlation
and moderated multiple regression techniques. The study findings indicated that debt
levels (β 1 = 0.5422, ρ<0.05), liquidity (β 3 = -0.0275, p < 0.05) and inventory (β 4 = -
0.0399, p < 0.05) have a significant effect on firm trade credit with an explanatory
power of 56% (R 2 = 0.5695, p< 0.05), while collateral (β 2 = -0.1363, ρ > 0.05) have an
insignificant effect. On the other hand, firm age has a significant moderating effect on
the relationship between determinants and trade credit. In particular, firm’s age has
significant interaction effect on debt level (β 6 = -2.3609, p < 0.05), the interaction
effects on liquidity (β 8 = -2.4649, p < 0.05). Therefore, firms need to establish a well-
defined trade-credit granting criteria to assess the creditworthiness of the buyers to
avoid default risk or late payment by buyers. Firms should be cautious while pledging
an asset as collateral since the bank has exclusive access to pertinent information.
Also, firms should hold liquid assets to meet their financial obligations. There is also
a need for firms to transform the raw material supplied into finished goods so that
suppliers’ advantage in repossessing and selling supplied goods is reduced. The study
also contributes to credit substitution theory by indicating the possibility of using
internal equity or external debt financing that cannot be undervalued in the market.