Study reveals how businesses used trade credit to manage financial risk

As the COVID-19 pandemic upended global markets, firms were forced to rethink their financial strategies in the face of unprecedented uncertainty. New research by Thanh Ngo, finance professor in East Carolina University’s College of Business, sheds light on how U.S. companies adjusted their trade credit practices — a vital element of working capital management — during this period of economic disruption.

The study, conducted using quarterly data surrounding the onset of the pandemic, investigates how firms modified their trade credit policy in response to growing economic uncertainty. Ngo’s research focused on how these changes were influenced by a company’s financial flexibility, operational adaptability and status as a government contractor.

Conservative credit practices amid crisis

Findings from the study show that many companies adopted more conservative trade credit policies during the pandemic to preserve liquidity. Firms sought faster payments from customers while simultaneously facing shorter payment terms from suppliers — effectively minimizing their exposure to delayed cash flows.

However, these responses were not uniform. Companies with strong financial flexibility (lower debt levels) and greater operating agility managed to maintain more stable trade credit practices throughout the crisis. Firms engaged in government contracting demonstrated even greater resilience, with no significant changes to their credit policies, suggesting that public sector partnerships provided a stabilizing effect during economic turmoil.

Insights for financial and risk management professionals

Ngo’s research offers practical guidance for a range of business professionals, including:

• Chief financial officers and treasury managers responsible for managing liquidity
• Credit and accounts receivable/payable professionals setting payment terms
• Financial analysts evaluating firm resilience
• Risk managers developing response plans for economic shocks
• Supply chain leaders maintaining continuity with vendors
• Government contractors and business development leaders exploring crisis-resistant clientele

Top takeaways for business strategy

• Liquidity becomes a top priority in uncertainty. Companies respond to economic shocks by tightening trade credit policies — seeking quicker customer payments while accepting reduced timeframes from suppliers.
• Flexibility matters. Firms with lower debt and adaptable operations are better equipped to maintain consistent practices during disruption.
• Public contracts provide stability. Government-affiliated firms experienced minimal disruption in their trade credit terms, highlighting the buffer that public sector partnerships can provide.

Ngo’s research underscores the importance of financial foresight and operational flexibility in navigating future economic crises — and provides a roadmap for business leaders looking to enhance resilience in an unpredictable world.

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