09-17-2026
For finance and supply chain leaders, working capital is often viewed as a company-level issue: How much cash is available? How much credit can the business secure? How quickly can customers pay?
Research by Purdue University’s Cathy Zhang and Sebastien Lotz of Université Paris-Panthéon-Assas suggests those questions may be incomplete. In a supply chain, a firm’s access to credit can depend not only on its own financial position, but also on the liquidity and credit conditions of the businesses it buys from and sells to.
In their working paper, “Trade Credit Chains and Monetary Policy,” the researchers develop a general equilibrium model in which firms purchase inputs from suppliers before receiving revenue from downstream sales. Transactions can be settled with money or unsecured trade credit.
Firms in the middle of this chain are both borrowers and lenders. They obtain credit from suppliers while also extending credit downstream. As a result, financing conditions at different stages reinforce one another.
Downstream liquidity and access to credit affect the value of a firm’s downstream business. That value, in turn, influences the firm’s incentive to repay its upstream supplier. When this feedback is sufficiently strong, the model can generate both high-credit and low-credit outcomes.
The researchers call this amplification mechanism a “vertical multiplier.” A deterioration in credit conditions at one stage can weaken credit at another stage, making an initial disruption larger than it would be if each relationship were considered separately.
For finance leaders, one implication is that credit risk may need to be evaluated beyond an immediate supplier or customer.
A firm’s ability to obtain supplier credit can depend partly on the value and financing conditions of its downstream business. If downstream customers have less liquidity or less access to credit, the value of that business can fall. That can weaken the incentives supporting supplier credit upstream, even if the firm’s own technology or operations have not changed.
This suggests that supply chain risk assessments should consider how financing conditions are connected across supplier-customer relationships. Looking jointly at payment behavior, liquidity conditions, and exposure to downstream customers may reveal risks that would be missed by evaluating each relationship independently.
The mechanism is also different from conventional collateral-based lending. Trade credit in the model is sustained through incentives. A firm repays its supplier because default would jeopardize its future access to credit and reduce the value of its downstream business.
The research also highlights why internal funds are not necessarily a costless substitute for supplier credit.
To use internal funds for future input purchases, firms must carry liquid balances forward. Holding that liquidity has an opportunity cost. Trade credit allows firms to bridge the period between purchasing inputs and receiving downstream revenue without pre-positioning all of the necessary liquidity.
For finance leaders, this means supplier payment terms are part of the firm’s financing structure rather than simply a procurement detail. Changes in payment terms can affect liquidity needs, financing costs, and how much the firm is able to produce.
The paper also cautions against interpreting more trade credit as automatically better. Trade credit is valuable because it relaxes liquidity constraints, but it also reflects underlying frictions. The key concern is whether disruptions push otherwise viable relationships toward a self-reinforcing low-credit outcome.
The model also illustrates how contract design can affect the distortions created by limited liquidity.
In one exercise, the researchers consider a contract in which the supplier is paid only when the downstream sale occurs. When payment constraints are not binding, this kind of arrangement can eliminate one source of inefficiency created by requiring payment before the firm knows whether the downstream transaction will take place.
The result should not be interpreted as a general prescription for a specific contract. Whether such arrangements are feasible depends on enforcement and credit constraints. Instead, the exercise illustrates a broader point: how payment obligations are structured across stages of a supply chain can affect financing incentives and economic efficiency.
The model also has implications for how firms may respond to changes in inflation and nominal interest rates.
It may seem natural to assume that as holding money becomes more costly, firms will simply rely more heavily on trade credit. The model shows that this is only partly true.
Over a range of moderate inflation or nominal interest rates, firms can substitute away from money and toward trade credit. But when rates become sufficiently high, the loss of liquidity across the chain can weaken the very incentives that support credit. Trade credit can then fall rather than continue to expand.
This non-monotonic response is important. It means the relationship between monetary conditions and trade credit depends on how liquidity and repayment incentives interact across the supply chain.
The broader lesson is that liquidity and credit conditions should not be evaluated one relationship at a time.
Because financing conditions at different links reinforce one another, a disruption at one stage can have larger effects elsewhere in the supply chain. A firm’s access to credit may depend not only on its own balance sheet, but also on the value and financing conditions of the businesses connected to it.
For finance and supply chain leaders, that means understanding those connections may be as important as monitoring any single counterparty.
