Corporate Liquidity during the COVID-19 Crisis: The Trade Credit Channel

Using unique daily data of payment defaults on suppliers in France, we show how the trade credit channel amplified the demand shock that firms met during the COVID-19 crisis. That channel dramatically increased short-term liquidity needs during the first months of the pandemic. A one standard deviation higher ratio of net debt to suppliers over sales increases the probability of payment default by roughly a third in sectors that were forced to shut down. This effect is extremely heterogeneous across sectors as well as across firms, depending on financing constraints. Understanding the cyclical trade credit dynamics, which drains corporate liquidity out when activity stops and rebuild it in the medium-term when activity recovers, is central for policy makers seeking to enable illiquid but solvent companies to remain afloat until revenues recover.