Credit Management Strategies for Small Firms
When a small firm sells goods or services to another firm, it generally grants trade credit to the buyer for these purchases. While the acade1nic and practitioner literature on credit management for large firms is voluminous, there is little in this literature which suggests appropriate credit Management strategies, given the particular characteristics of the small firm. Several characteristics of small firms can lead to advantageous credit policies which are different from larger firms. Among these are returns-to-scale problems in adopting several credit management strategies, Management which has limited expertise in finance, and restricted access to outside financing. In this paper, the effects of these differences on trade credit strategy are considered. Four areas of credit strategy are analyzed: credit investigation and risk assessment, credit-granting decisions, collections, and bearing credit risk. The paper presents and critiques trade credit policies for the small firm in each of these areas, including policy alternatives which involve the outsourcing of one or more aspects of credit management.
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