Record Trade Credit Levels could Damage Economic Recovery

Posted on 4 June, 2014 by Kirsten Kennedy

Since the end of the recession and particularly in the past twelve months, business growth has flourished and gone a long way in strengthening the UK’s still fragile economy. However, experts are now concerned that a large part of this growth has been built upon a foundation of credit as opposed to solid financial backing – one of the issues which first began to cause difficulties in the mid-2000s and contributed to the financial crash in 2008.

Record-Trade-Credit-Levels-could-Damage-Economic-Recovery

According to a report conducted jointly by the Credit Management Research Centre and supplier finance network Taulia, British businesses now owe their peers around £75 billion in total, pushing trade credit levels to record new highs. This, the report believes, is due to businesses engaging in peer to peer borrowing as a result of the reductions in bank funding.

The issue is most apparent in small to mid-sized companies (SMEs), many of whom are now beginning to struggle with the levels of debt they owe to suppliers and customers. Unfortunately, this problem is rather severe given the current economic situation, as in attempting to repay these debts businesses are limiting their cash flow and thus lessening their ability to channel investment into growth – something which could have a profoundly negative effect upon business and economic growth.

European managing director at Taulia, John Keating, believes that trade credit is not necessarily the problem: rather, the issue lies with businesses being unable to use the tool effectively.

He says; “Trade credit is being used as a blunt instrument by many companies, with outdated practices poorly adapted to today’s new economic environment.

“We believe this is a serious threat to the UK economy.

“Many small firms do not have the knowledge, understanding, tools or credit management processes in place to understand how to optimise the use of their trade credit.”

In a nutshell, trade credit refers to the practice of granting credit by non-financial terms, and has now reached £327 billion in the UK – a sum 20 per cent larger than the size of bank credit at present. This means it is now the single largest source of funding available to UK businesses and 80 per cent of everyday business to business transactions are processed in this way.

In other words, UK commerce relies heavily upon trade credit, and there is a high likelihood that business transactions would grind to a halt without it.

Although there is a small amount of bad practice in supplier treatment highlighted in the report, the main concern remains the amount of trade credit supplied to small firms by their larger peers. SMEs now receive around £50 billion more than they advance in trade credit, meaning it is easy to allow the debts to pile up and therefore struggle to meet payment deadlines.

Report author, Professor Nick Wilson, says; “Big businesses may not be the villain of the piece, with small firms taking ten days longer to pay.

“Not only does it demonstrate the SME’s reliance on trade credit, but also damages their future ability to secure finance with the banks.”

Do you think regulations should be tightened around trade credit to protect both customers and suppliers?




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