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DETERMINANTS AND DYNAMICS OF TRADE CREDITS: EVIDENCE FROM QUOTED SMES IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Trade credit is a vital financial tool that facilitates business operations, especially for small and medium-sized enterprises (SMEs) in developing countries like Nigeria. Defined as the credit extended by suppliers to businesses to buy goods and services, trade credit plays a crucial role in alleviating the cash flow constraints faced by SMEs (Akinola et al., 2021). In Nigeria, SMEs account for over 48% of the country’s GDP and provide approximately 60% of total employment, highlighting their significance in the economy (National Bureau of Statistics [NBS], 2020). Despite their contributions, many SMEs struggle with accessing formal financing options due to stringent lending requirements, making trade credit an essential alternative for sustaining their operations (Ogunyemi & Afolabi, 2020).

Research indicates that trade credit is influenced by various determinants, including firm characteristics, industry dynamics, and economic conditions (Nguyen et al., 2021). The ability of SMEs to negotiate favorable trade credit terms can significantly impact their liquidity and operational efficiency. Factors such as supplier relationships, credit policies, and market competition play pivotal roles in shaping trade credit dynamics among SMEs (Asuquo & Edet, 2021). Furthermore, trade credit can act as a signal of financial health, with firms offering credit often demonstrating confidence in their customers’ ability to repay (Elston & Haug, 2022).

Trade credits can vary widely among different sectors and economic environments, and this variability warrants a deeper understanding of the dynamics at play within Nigeria’s SME sector. The need for empirical evidence on the determinants of trade credits in Nigeria is paramount, as existing literature predominantly focuses on developed economies, leaving a significant research gap concerning developing markets (Uddin et al., 2019). Understanding the intricacies of trade credits in Nigerian SMEs can provide valuable insights for policymakers and financial institutions aiming to bolster the sector’s growth and sustainability.

Moreover, Nigeria’s economic landscape, characterized by fluctuating exchange rates, inflation, and regulatory challenges, adds complexity to trade credit dynamics. These external economic factors can profoundly affect SMEs' ability to access and utilize trade credits effectively (Ojo & Agboola, 2023). The intersection of internal firm capabilities and external market conditions necessitates a comprehensive exploration of the determinants influencing trade credit usage in Nigeria. Thus, this study aims to fill this gap by investigating the factors influencing trade credits among quoted SMEs in Nigeria, providing empirical evidence and actionable insights.

Additionally, the increasing digitization of business transactions and the rise of e-commerce in Nigeria have transformed how SMEs engage in trade credits. Digital platforms enable SMEs to expand their supplier networks, often resulting in improved terms of trade credit. This evolution presents both opportunities and challenges for SMEs, as the competitive landscape becomes more dynamic (Ajayi & Obembe, 2021). Understanding these changes and their implications on trade credit dynamics is critical for SMEs seeking to leverage new technologies to enhance their operational capabilities.

Furthermore, the impact of trade credits on firm performance cannot be overstated. Previous studies have shown a positive correlation between effective trade credit management and financial performance metrics, such as return on assets and profitability (Wong et al., 2021). This relationship underscores the necessity for SMEs to adopt strategic approaches to manage their trade credit effectively. By analyzing the determinants and dynamics of trade credits, this study aims to contribute to a better understanding of how SMEs can optimize their financial resources and improve overall performance.

The findings from this research will also have implications for practitioners in the field of finance and entrepreneurship, providing them with insights into the best practices for managing trade credits. By identifying key determinants and exploring their dynamics, SMEs can enhance their negotiation strategies with suppliers and improve their cash flow management. Consequently, this research seeks to provide a framework that SMEs can use to navigate the complexities of trade credit in the Nigerian market, ultimately leading to more sustainable business practices.

In summary, trade credits are integral to the operational success of SMEs in Nigeria, yet there exists a significant gap in empirical research regarding their determinants and

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