The Impact Of Trade Credit On Small And Medium-Sized Enterprises' Profitability: Empirical Evidence From Ethiopia

Abstract

The study examined the impact of trade credit on the profitability of small and medium-sized enterprises (SMEs) in Ethiopia, employing panel data covering from 2014 to 2023. Trade credit is a widely used type of short-term financing, enables firms to acquire goods and service on account and defer payment. While it plays a crucial role in business activity, especially for resource-constrained Small and Medium Sized Enterprises (SMEs), its implication for firm profitability remain an area of active research. To address this issue, the study employed a quantitative research method using secondary firm-level financial data collected from the Federal Micro and Small Enterprises Development Agency (FeMSEDA) and the Ethiopian Central Statistics Authority (CSA). A stratified sampling technique was employed to ensure representation across diverse industry sectors. Both descriptive statistics and econometric techniques were applied. The econometric analyses were conducted using panel regression models-specifically the Fixed Effects Model (FEM)-which was selected based on the Hausman test results. The analysis results implies that trade credit has a statistically significant negative impact on the profitability of Small and Medium-sized Enterprises (SMEs) in Ethiopia. Conversely, liquidity and firm size are positively related with profitability, while firm age exerts a negative impact. The research finding disclose the need for SMEs underline the need for SMEs to manage the usage of trade credit carefully and underscore the importance of maintaining strong liquidity positions and supporting firms growth to improve performance. The study concludes that while trade credit serves as an important financial tool, over-reliance on it may erode profitability. Accordingly, targeted financial management strategies and supportive policies are recommended to promote sustainable SME performance in Ethiopia