The paper "In-kind Finance: A Theory of Trade Credit" by Mike Burkart and Tore Ellingsen explores the role of input suppliers in providing trade credit and its implications for credit markets. The authors argue that suppliers are more willing to lend inputs than cash because inputs are less easily diverted and more difficult to monitor, which gives suppliers an informational advantage over banks. This advantage is central to the model's explanation of why trade credit exists, varies across countries and firms, and is less cyclical than bank credit. The model predicts that trade credit and bank credit can be either complements or substitutes, depending on the firm's debt capacity. Trade credit increases the amount banks are willing to lend, as it allows borrowers to invest more while still having the option to divert resources. This complementarity explains why trade credit is more prevalent in less developed credit markets and why large, unrated firms' accounts payable are more countercyclical than those of small firms. The paper also discusses how trade credit dynamics vary over the business cycle. Constrained firms reduce both bank and trade credit during recessions, while unconstrained firms increase their trade credit borrowing. Additionally, the model predicts that trade credit is procyclical for firms that exhaust their trade credit limit and countercyclical for those who do not. Finally, the authors extend their model to include accounts receivable, showing that firms can use trade credit claims as collateral to obtain additional bank credit, which further explains the role of trade credit in funding.The paper "In-kind Finance: A Theory of Trade Credit" by Mike Burkart and Tore Ellingsen explores the role of input suppliers in providing trade credit and its implications for credit markets. The authors argue that suppliers are more willing to lend inputs than cash because inputs are less easily diverted and more difficult to monitor, which gives suppliers an informational advantage over banks. This advantage is central to the model's explanation of why trade credit exists, varies across countries and firms, and is less cyclical than bank credit. The model predicts that trade credit and bank credit can be either complements or substitutes, depending on the firm's debt capacity. Trade credit increases the amount banks are willing to lend, as it allows borrowers to invest more while still having the option to divert resources. This complementarity explains why trade credit is more prevalent in less developed credit markets and why large, unrated firms' accounts payable are more countercyclical than those of small firms. The paper also discusses how trade credit dynamics vary over the business cycle. Constrained firms reduce both bank and trade credit during recessions, while unconstrained firms increase their trade credit borrowing. Additionally, the model predicts that trade credit is procyclical for firms that exhaust their trade credit limit and countercyclical for those who do not. Finally, the authors extend their model to include accounts receivable, showing that firms can use trade credit claims as collateral to obtain additional bank credit, which further explains the role of trade credit in funding.