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Trade credit is a key source of short-term finance. This paper develops a model where
trade credit reduces borrowing from banks. This reduction gives rise to a financing cost
advantage of trade credit that increases in the product of markups and borrowing costs.
Chilean export data confirm this prediction. A one-standard-deviation rise in upstream
markups increases trade credit by 9 days. The intensive margin is responsible for about
60 percent of this effect, which strengthens with destination-country borrowing costs. We
estimate that trade credit allows U.S. firms to reduce formal borrowing by $1.4 trillion,
generating annual savings of $39 billion.
