Trade credit dynamics on profitability of small and medium-scale enterprises in Nigeria

The issue of accessible funding has remained one of the major challenges facing the growth of Small and Medium-Scale Enterprises (SMEs) in Nigeria. With the reducing flow of funds from the financial institutions to the SMEs and its implications on their performance, the need to employ trade credit as an alternative finance becomes relevant. Therefore, this study examined the effect of trade credit dynamics on the profitability of SMEs in South-West Nigeria. Secondary data for 120 firms, from 2014–2016, was used for the study. Panel pooled OLS, panel fixed effect, panel random effect, hausman test and generalised method of moments (GMM) were used to analyse the secondary data. The panel fixed effect analysis revealed that trade credit had negative and significant impact on the profitability of SMEs. The GMM result indicated that the dynamic changes of trade credit had not significantly improved SMEs profitability. The study concluded that the ineffective dynamic changes of trade credit contributed to the negative impact of trade credit on SMEs profitability. The study recommended that SMEs should determine firm specific optimum level for trade credit usage as alternative finance for positive impact. Suppliers should extend discount periods and relax assessment procedures to ensure positive dynamic impact on SMEs profitability.