On the Ethics of Trade Credit

Understanding Good Payment Practice in the Supply Chain

Christopher J. Cowton, Leire San-Jose

Research output: Contribution to journalArticle

8 Citations (Scopus)

Abstract

In spite of its commercial importance and signs of clear concern in public policy arenas, trade credit has not been subjected to systematic, extended analysis in the business ethics literature, even where suppliers as a stakeholder group have been considered. This paper makes the case for serious consideration of the ethics of trade credit and explores the issues surrounding slow payment of debts. It discusses trade debt as a kind of promise, but—noting that not all promises are good ones—goes on to develop an analysis of the ethics of trade credit grounded in an understanding of its fundamental purpose. Making a distinction between “operating” trade credit and “financial” trade credit, the paper provides an account of the maximum period for which it is appropriate for one company to delay payment to another from which it has purchased goods or services. The concern of commentators and policy makers that companies should not take too long to pay their debts is affirmed, but the understanding of what timely payment means is significantly finessed, with one conclusion being that, if debts have not already been settled according to acceptable standard terms of trade, cash should pass quickly back along the supply chain once the customer in the final product market has paid. The analysis has implications not only for companies that take credit but also for external parties that seek to rate companies or set regulations according to speed of payment—an approach that is shown to be misleadingly simplistic, albeit well intentioned. A corresponding important responsibility for suppliers, not to extend excessive credit (and thus act as a quasi-bank), also follows from the analysis developed. Having provided a novel analysis of an important business problem, the paper then discusses some of the related practical issues and makes suggestions for further research.

Original languageEnglish
Pages (from-to)673-685
Number of pages13
JournalJournal of Business Ethics
Volume140
Issue number4
Early online date16 Mar 2016
DOIs
Publication statusPublished - Feb 2017

Fingerprint

payment practices
credit
moral philosophy
supply
indebtedness
supplier
terms of trade
business ethics
Supply chain
Trade credit
Payment
Credit
bank
Debt
public policy
customer
stakeholder
regulation

Cite this

@article{393fdebb3cd4425ca9c1b3fd43d5eabc,
title = "On the Ethics of Trade Credit: Understanding Good Payment Practice in the Supply Chain",
abstract = "In spite of its commercial importance and signs of clear concern in public policy arenas, trade credit has not been subjected to systematic, extended analysis in the business ethics literature, even where suppliers as a stakeholder group have been considered. This paper makes the case for serious consideration of the ethics of trade credit and explores the issues surrounding slow payment of debts. It discusses trade debt as a kind of promise, but—noting that not all promises are good ones—goes on to develop an analysis of the ethics of trade credit grounded in an understanding of its fundamental purpose. Making a distinction between “operating” trade credit and “financial” trade credit, the paper provides an account of the maximum period for which it is appropriate for one company to delay payment to another from which it has purchased goods or services. The concern of commentators and policy makers that companies should not take too long to pay their debts is affirmed, but the understanding of what timely payment means is significantly finessed, with one conclusion being that, if debts have not already been settled according to acceptable standard terms of trade, cash should pass quickly back along the supply chain once the customer in the final product market has paid. The analysis has implications not only for companies that take credit but also for external parties that seek to rate companies or set regulations according to speed of payment—an approach that is shown to be misleadingly simplistic, albeit well intentioned. A corresponding important responsibility for suppliers, not to extend excessive credit (and thus act as a quasi-bank), also follows from the analysis developed. Having provided a novel analysis of an important business problem, the paper then discusses some of the related practical issues and makes suggestions for further research.",
keywords = "Creditors, Promise-keeping, Purchasing, Suppliers, Supply chain, Trade credit",
author = "Cowton, {Christopher J.} and Leire San-Jose",
year = "2017",
month = "2",
doi = "10.1007/s10551-016-3050-9",
language = "English",
volume = "140",
pages = "673--685",
journal = "Journal of Business Ethics",
issn = "0167-4544",
publisher = "Springer Netherlands",
number = "4",

}

On the Ethics of Trade Credit : Understanding Good Payment Practice in the Supply Chain. / Cowton, Christopher J.; San-Jose, Leire.

In: Journal of Business Ethics, Vol. 140, No. 4, 02.2017, p. 673-685.

Research output: Contribution to journalArticle

TY - JOUR

T1 - On the Ethics of Trade Credit

T2 - Understanding Good Payment Practice in the Supply Chain

AU - Cowton, Christopher J.

AU - San-Jose, Leire

PY - 2017/2

Y1 - 2017/2

N2 - In spite of its commercial importance and signs of clear concern in public policy arenas, trade credit has not been subjected to systematic, extended analysis in the business ethics literature, even where suppliers as a stakeholder group have been considered. This paper makes the case for serious consideration of the ethics of trade credit and explores the issues surrounding slow payment of debts. It discusses trade debt as a kind of promise, but—noting that not all promises are good ones—goes on to develop an analysis of the ethics of trade credit grounded in an understanding of its fundamental purpose. Making a distinction between “operating” trade credit and “financial” trade credit, the paper provides an account of the maximum period for which it is appropriate for one company to delay payment to another from which it has purchased goods or services. The concern of commentators and policy makers that companies should not take too long to pay their debts is affirmed, but the understanding of what timely payment means is significantly finessed, with one conclusion being that, if debts have not already been settled according to acceptable standard terms of trade, cash should pass quickly back along the supply chain once the customer in the final product market has paid. The analysis has implications not only for companies that take credit but also for external parties that seek to rate companies or set regulations according to speed of payment—an approach that is shown to be misleadingly simplistic, albeit well intentioned. A corresponding important responsibility for suppliers, not to extend excessive credit (and thus act as a quasi-bank), also follows from the analysis developed. Having provided a novel analysis of an important business problem, the paper then discusses some of the related practical issues and makes suggestions for further research.

AB - In spite of its commercial importance and signs of clear concern in public policy arenas, trade credit has not been subjected to systematic, extended analysis in the business ethics literature, even where suppliers as a stakeholder group have been considered. This paper makes the case for serious consideration of the ethics of trade credit and explores the issues surrounding slow payment of debts. It discusses trade debt as a kind of promise, but—noting that not all promises are good ones—goes on to develop an analysis of the ethics of trade credit grounded in an understanding of its fundamental purpose. Making a distinction between “operating” trade credit and “financial” trade credit, the paper provides an account of the maximum period for which it is appropriate for one company to delay payment to another from which it has purchased goods or services. The concern of commentators and policy makers that companies should not take too long to pay their debts is affirmed, but the understanding of what timely payment means is significantly finessed, with one conclusion being that, if debts have not already been settled according to acceptable standard terms of trade, cash should pass quickly back along the supply chain once the customer in the final product market has paid. The analysis has implications not only for companies that take credit but also for external parties that seek to rate companies or set regulations according to speed of payment—an approach that is shown to be misleadingly simplistic, albeit well intentioned. A corresponding important responsibility for suppliers, not to extend excessive credit (and thus act as a quasi-bank), also follows from the analysis developed. Having provided a novel analysis of an important business problem, the paper then discusses some of the related practical issues and makes suggestions for further research.

KW - Creditors

KW - Promise-keeping

KW - Purchasing

KW - Suppliers

KW - Supply chain

KW - Trade credit

UR - http://www.scopus.com/inward/record.url?scp=84962611321&partnerID=8YFLogxK

U2 - 10.1007/s10551-016-3050-9

DO - 10.1007/s10551-016-3050-9

M3 - Article

VL - 140

SP - 673

EP - 685

JO - Journal of Business Ethics

JF - Journal of Business Ethics

SN - 0167-4544

IS - 4

ER -