Inventory composition and trade credit

•We establish a link between firm trade credit usage and inventory composition.•Large stocks of raw materials incentivise firms to extend more trade credit.•Stronger incentive for suppliers of specialised products•The sellers' incentives to extend credit can vary if buyers process goods.•We use data for a very large panel of French firms across economic sectors

This empirical paper uses a panel of about half a million observations for French firms across economic sectors to investigate how the type of inventories can affect firms' incentives to use trade credit. We find evidence that trade credit extended is influenced by the extent to which firms hold different types of inventories. Moreover, we show that the strength of the relationship varies across economic sectors. Finally, we find that as buyers process goods, the sellers' incentives to extend trade credit diminish.