Substitute or Complement? Examining the Moderating Role of Tangibility in MSME Financing Decisions

Abstract

This paper investigates the relationship between bank credit and trade credit, emphasising the moderating role of firm tangibility within the context of Indian manufacturing MSMEs. Using a balanced panel dataset covering the period from 2014 to 2023, the research analyses how firms manage access to different financing sources and how tangible assets influence this interaction. The findings reveal a significant negative relationship between bank credit and trade credit, indicating a substitution effect where firms rely less on trade credit when formal bank financing is available. However, the results further indicate that as firm tangibility increases, the relationship shifts towards complementarity, suggesting that firms with higher tangible assets are better positioned to utilise both sources of credit simultaneously. This highlights the critical role of asset tangibility in strengthening firms’ credibility with both banks and suppliers, thereby enhancing access to multiple financing channels. By uncovering this dual effect, the current research contributes to a deeper understanding of financing dynamics among MSMEs in emerging economies. The study also fills a notable gap in the literature, as limited research has examined the moderating influence of firm tangibility on the interplay between bank credit and trade credit. These insights hold significant implications for policymakers, financial institutions, and business stakeholders seeking to improve credit accessibility and develop targeted strategies to support MSME growth and sustainability.