Bank loans, trade credit, and liquidity shortages of small businesses during the financial crisis☆

We investigate how small businesses responded to liquidity shortages during the financial crisis, focusing on heterogeneity between young and mature firms. With the sudden onset of the financial crisis, many small businesses faced declines in cash flows and liquidity shortages. Using over 4 million firm-year observations from Japan, we show that mature firms used bank loans more than young firms when facing liquidity shortages. This is consistent with previous studies indicating that banks offer liquidity provisions to firms with which they have close lending relationships. By contrast, trade payables did not largely increase for mature or young firms during the crisis. This suggests that mature firms relied on banks, not suppliers, for liquidity provision during the crisis. Furthermore, mature firms that experienced declines in cash flow during and after the crisis were likely to default and exit. This implies that credit allocation to mature firms is inefficient.