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UK Recovery Threatened By £75bn Trade Credit Gap

Trade credit not bank credit is the key to securing sustained economic recovery

Consumer debt is not the only debt threatening our economic recovery, the current recovery started with an unprecedented £75bn trade credit gap, which appears to be widening. Experts are warning that this gap requires a new approach to cash flow management from UK businesses in order to secure sustained national growth without a rash of business failures.

At about £327bn, trade credit, the granting of credit by non-financial firms to their customers, is now 20 percent larger than the size of bank credit.Trade creditis identified as the biggest single source of finance to UK business in a briefing, ‘Charting the Trade Credit Divide,’ published today by Taulia ( The briefing is based on new analysis of 15 million limited company reports filed between 1998 and 2012, conducted by Professor Nick Wilson of the Credit Management Research Centre.

The research shows significant shifts in the shape of trade credit. In a pattern not seen in the past two economic cycles the cash owed by businesses increased significantly beyond the sums that they were owed and this gap between the total trade creditors and total trade debtors, then continued to widen as the recovery began, reaching £75bn in 2012. This is a swing of £94bn in trade debt balance since the UK emerged from the last downturn in 2004 when debtors exceeded creditors by £19bn.

This swing shows that businesses are not only more dependent on trade credit than ever before but also that the recovery depends on this credit being paid off in order to release working capital.

The lessons from two previous periods of boom and bust have not been heeded

UK Recovery Threatened By £75bn Trade Credit Gap

UK Recovery Threatened By £75bn Trade Credit Gap

This research, believed to be the most comprehensive analysis of trade credit practices in the UK corporate sector ever undertaken, is particularly valuable because it spans two previous periods of boom and bust and offers insight into the impact of trade credit on the balance sheets of businesses entering today’s recovery.

Immediately prior to insolvency, trade creditors increase as businesses try to fund their working capital by paying suppliers more slowly. The £75bn gap between debtors and creditors highlighted above, indicates an increasing risk of insolvency this time around unless there is a radical change in approach to trade finance management. The insolvency threat is even more real as many new businesses are knowledge-based or service-based businesses with few traditional assets on which to secure finance. As a result, these companies are more dependent on trade credit.

“The analysis shows that the UK faces a very different business debt challenge in this recovery, one which will require a new, proactive, management approach to the use of trade credit if businesses are to thrive and survive.” said Professor Nick Wilson. “Smart buyers are starting to think more strategically about managing credit from their supply chains and adopting practices where it is in their in interest to pay early, such as reduced cost of goods, better supplier health, reduced risk and exclusive supplier relationships. For suppliers, having more control over when to receive payment, can address many of the challenges highlighted by this report – such as certainty of payment, enhanced cash-flow and a much reduced risk profile with traditional lenders.”

“Trade credit is being used as a blunt instrument by many companies, with outdated practices poorly adapted to today’s new economic environment,” said Jon Keating, European Managing Director at Taulia. “We believe this is a serious threat to the UK economy.  A business that can demonstrate it is in control of its trade credit will have more options open to it to secure strategic finance for growth.”

The results of the study, summarised below, have significant implications for UK PLC.

Trade credit NOT bank finance is fuelling the engine of the economy, SMEs

80% of everyday B2B transactions are on credit terms, without trade credit the economy would grind to a halt. The stocks and flows of trade credit are typically twice the size of those for bank credit and, trade credit flows often exceed the primary money supply! Trade credit has risen in importance as a source of finance across all sectors as the economy moves towards recovery. The trade credit gap widening is contrary to previous recoveries.

For small firms trade credit is often the only source of external finance and SMEs will need to rely on trade credit to fund survival/growth in the post-recession period

Trade credit represents about 20% of total borrowings for large firms, for small firms it is over 90% and, therefore, often the only source of finance. Despite this reality, many smaller firms do not have the knowledge, understanding, tools or credit management processes in place to understand how to optimise their use of trade credit. In order to compete small companies have to extend trade credit to their customers and therefore having sophistication in the management of cash inflows and outflows is critical to success and growth

The UK could lose its brightest young businesses to a cash-flow crisis – earlier payment could release £199bn of working capital

For SMEs the challenge of absorbing the cost of delayed payments is huge. The average debtor days across the research sample was 58, producing £327bn of trade debt. If the average could be reduced to 30, this would have released over £199bn in working capital, £35bn of that for small and micro firms in 2012.

While 30 days may not be achievable, each improvement of five days would release an additional £29bn of working capital for all companies, over £7.7bn of that for SMEs This cash release could be the difference between survival and insolvency.

Big business may not be the villain of the piece – small firms take 10 days longer to pay

Received wisdom is that it is big businesses that cause problems for small businesses with late payments and extended payment terms. However, while there are examples of bad practice in supplier treatment, this research shows that large firms are net providers of trade credit to smaller firms with SMEs receiving £50bn more than they advance in trade credit. In addition, smaller firms generally take longer to pay suppliers – by up to 10 days – than larger companies. This further demonstrates the reliance of SMEs on trade credit as a flexible source of finance. It is also a practice that hurts SMEs ability to secure traditional finance.

Changing trade credit practices for good, and the good of the UK

The research demonstrates that there is an urgent need to begin to transform the attitudes towards trade credit and the way it is managed by both large and small businesses. As a result of these findings, Taulia has convened The Trade Credit Improvement Consortium a partnership formed with the Association of Chartered Certified Accountants (ACCA), the Chartered Institute of Purchasing and Supply (CIPS) and the Institute of Credit Management (ICM) to help buyers and suppliers transform their trade credit practices.

The Consortium is developing a practical tool kit to enable businesses and their advisors to evaluate their trade credit practices and equip them to make any changes needed to optimise their use of this critical source of funding. Businesses can reserve their toolkit and make a commitment to improving their trade credit practices by registering at:

“Companies don’t always understand the cost benefit equation of trade credit or have the tools to manage it” said Keating. We believe it is time to remove this gap in knowledge to help release much needed working capital. That’s why we’ve partnered with the ACCA, CIPS and the ICM. We believe the tools we are creating together will make a big difference to trade credit behaviour.

“Now is the time to revolutionise the use of trade credit as part of the finance mix in the UK – the health and sustainability of the recovery depends upon it,” said Keating.

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