The use of hard and soft information in trade credit decisions

Abstract

PURPOSE: Trade Credit is a vital source of finance for SMEs. Lamentably, there is a paucity of literature on how SMEs established in Malta approach trade credit decisions, that is, either by using hard information or through informally generated information. This study intends to address this literature gap by investigating the type of information used when taking TC decisions. DESIGN: To achieve the objectives of the study, a qualitative research approach was employed, were semi-structured interviews were conducted with representatives of several SMEs and credit rating agencies in Malta. FINDINGS: The majority of medium-sized entities agreed that hard information is of essential importance at the initial stages when granting credit, soft information is also taken into consideration. Whilst the majority of small entities interviewed consider soft information of essential importance when granting credit and do not opt to use FSs. Furthermore, the majority of credit rating agencies interviewed consider both hard and soft information vital in assessing the credit risk of a customer. CONCLUSION: When comparing the local SMEs findings of this study to an alternative source of finance being bank credit and also to other selected countries in Collis et al. (2013) study it is noted that there are several similarities and differences on the use of hard and soft information in trade credit decisions. This is also evident when comparing local CRAs findings to that of foreign literature. IMPLICATIONS: This study enhances local literature by giving reference to the type of information used by SMEs and credit rating agencies in the trade credit process. Several recommendations and areas for further research are provided.