Does trade credit really help relieving financial constraints?

The European Union introduced a directive aimed at reducing trade credit due to its supposedly negative effect on the European economy. This contrasts with the redistribution view arguing that trade credit could facilitate the financing of credit-constrained firms by more liquid suppliers. But does trade credit mainly flow from relatively unconstrained suppliers to more financially constrained buyers? To answer this question, we look at the characteristics of net borrowers with respect to net lenders and then estimate the substitutability between trade and bank debt separately for the two groups of firms. Overall, the results show that, in Italy, efficient redistribution does not tend to prevail in the trade credit market.