Building a Customer Base Under Liquidity Constraints

This paper explores how financing frictions shape the formation of a customer base. Since a customer base cannot be pledged as collateral, current expenses involved in attracting customers are likely to be financed internally. Hence, liquidity-constrained firms will underinvest in the expansion of the customer base. We exploit a French reform capping payment terms in trade credit contracts at sixty days as an exogenous shock on access to liquidity. Relying on administrative data covering the universe of financial statements and intra-EU trade relationships of French exporters, we show that holding demand and supply constant, a decrease in payment periods from existing customers enables firms to invest more in the expansion of their customer base. Further, we provide evidence that liquidity constraints prevent firms from reaching out to new customers, but not from competing on prices. As a result, the presence of liquidity constraints dampens the ability of firms to trade with distant customers and to sell differentiated products