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 (www.taulia.com). 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
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: www.securetherecovery.co.uk
“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.
Former Bank of England Governor Carney joins board of digital payments company Stripe
By Kanishka Singh
(Reuters) – Mark Carney, former head of the UK and Canadian central banks, has joined the board of U.S. digital payments company Stripe Inc, days after the company was reported to be planning a primary funding round valuing it at over $100 billion.
“Regulated in multiple jurisdictions and partnering with several dozen financial institutions around the world, Stripe will benefit from Mark Carney’s extensive experience of global financial systems and governance”, the company said on Sunday, confirming a report by the Sunday Times newspaper.
Forbes magazine had reported on Wednesday that investors were valuing Stripe at a $115 billion valuation in secondary-market transactions.
A senior Stripe executive told Reuters in December that the company plans to expand across Asia, including in Southeast Asia, Japan, China and India.
The company offers products that allow merchants to accept digital payments from customers and a range of business banking services.
Stripe raised $600 million in April in an extension of a Series G round and was valued back then at $36 billion.
Consumer-facing fintechs have seen a boost to their businesses during the COVID-19 pandemic, as people have been staying at home to avoid catching the virus and have increasingly been managing their finances online.
Carney, who headed the Bank of England and the Bank of Canada, had a 13-year career at Wall Street bank Goldman Sachs Group Inc in its London, Tokyo, New York and Toronto offices.
He is the United Nations special envoy on climate action and finance.
(Reporting by Kanishka Singh in Bengaluru; Editing by William Mallard)
The potential of Open Finance and the digitisation of tax records
By Sudesh Sud, Founder of APARI
The world is undergoing huge changes at the moment. Between coronavirus pushing the economy to the limit and a group of Redditors challenging the financial market hegemony, people are questioning the role of established institutions. If finance doesn’t work to enable the economy, businesses or individuals, then who is it for?
Before the digital revolution, financial experts were seen as a necessity. They knew how things worked, what everything meant, could provide good advice and were employed to sit at the heart of the action. Now, trading can be done by anyone online through established platforms, with a wealth of information available to hand.
Yet, as the 2008 financial crisis proved, established financial institutions have made themselves too big to fail. Simply tearing down the existing financial system would leave many ordinary people, along with businesses and government treasuries, in ruin.
However, as legendary futurologist, Buckminster Fuller, once said: “You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.”
Traditional banking models are already being upended by technology. Through Open Banking, challenger banks are able to connect services digitally, cutting inefficiencies and costs while speeding up transactions. Now, Open Finance is seeking to build on this model to connect financial services via technology, potentially making the existing financial model obsolete.
Just as Open Banking led to greater democratisation of money, Open Finance has the potential to transfer power back to individuals. Not only would this benefit society as a whole, but it would help minimise the boom-bust cycles that cripple entire economies. No individual would be too big to fail, and bailing people out would cost far less, having minimal impact on the economy overall.
With more information available to them, Open Finance businesses will be able to use technology to make better decisions instantly. Many people struggle to get onto the housing ladder due to a poor credit score, for example, yet they have been paying rent every month of their adult lives. Why, then, can they not access mortgages? A company called Credit Ladder is addressing this through Open Banking, reporting rent payments via challenger banks like Starling to credit agencies, helping good renters to access mortgages.
While it is still very early days for Open Finance, there seems to be an endless raft of possibilities to benefit individuals, businesses and national economies. Faster, more secure, and less risky access to credit can help grow the economy, transforming finance from something that benefits a few wealthy capitalists to something that enables growth in the real economy.
So how else could Open Finance benefit society?
Using Tax Information
Every working adult pays income tax. Some of us via self-assessment while others are enrolled in PAYE. Regardless, we all have tax records with a wealth of financial information that has been verified, at least in part, by HMRC.
This centralised repository of financial information could be put to better use, such as allowing credit reference agencies to better understand an individual’s risk profile or helping to prove income as part of a mortgage application. Unfortunately, HMRC is a black hole of information ‒ its sheer size and power sucks information in, but nothing comes back out again.
However, by Making Tax Digital (MTD), HMRC are effectively allowing individuals to keep validated tax records on the software of their choice. Software providers may then be able to use this information to enable certain aspects of Open Finance. The information doesn’t need to be protected by HMRC, it is the individual’s choice and responsibility over how to use their own information.
As MTD software develops, we will see it connected to Open Banking, allowing self-assessed taxpayers to connect their business account directly to the software, effectively getting their tax return completed for them by an AI program. They would simply check the details, add any adjustments, and click submit. HMRC would then validate the records, providing assurance for any financial institutions using that financial information.
More Growth, Lower Risk
With access to complete and validated financial information, lenders would be able to more quickly and accurately assess individual risk when considering a loan or mortgage application. This would greatly speed up the process of applying for a loan, whether for a business venture or property purchase, for example.
Take residential landlords, for example. They may own a few properties already, with equity coming out of their ears. If that landlord wants to obtain another property, they would need to get their accountant to assemble their financial information, complete a SA302, and send everything off to their mortgage advisors who would then validate the information before submitting the mortgage application.
The application can then take months to approve, slowing down the process and potentially leading to missed opportunities. Since property sales usually occur in a chain (the owner of the property you are purchasing is usually purchasing another property, and so on), these inefficiencies slow the process down for everyone and can have major impacts.
If, however, mortgage applicants could simply share validated financial/tax records, mortgage providers could use that information to make quick decisions with reduced risk. What’s more, applicants could share only relevant, high-level information, rather than expose their entire financial history.
Individual Risk Management
Currently, individuals can manage their credit score/risk profile via third party providers like Experian, Equifax and TransUnion. These credit reporting agencies use limited information, such as credit cards, store cards and loans to assess risk. Individuals need to understand what factors each agency uses in order to ‘game’ the system.
For example, someone who has always been careful with their money, kept to a strict budget and never taken out a loan or credit card will have a far worse credit rating than someone who regularly uses debt to finance their lifestyle. So, even though they may have amassed a good deal of savings, they cannot get a good deal on a loan or mortgage.
With Open Finance, these individuals would be able to quickly prove their earnings, spending, and savings, decreasing their risk profile in line with reality. Rather than crude measures of creditworthiness, financial institutions would be able to use accurate and validated information to make quick decisions based on realistic risk. This both transfers more power to individuals and contributes to faster growth while reducing overall risk.
As a centralised repository for validated financial information, MTD providers will be in a unique position to develop a two-sided marketplace for finance, allowing credit providers to match products to individuals’ risk profiles. When a customer needs a loan, credit card or mortgage, they can simply browse products for which they have already been approved, applying and receiving finance instantly.
Empowering PAYE Taxpayers
Currently, PAYE taxpayers have little, if any, visibility or control over their tax contributions. They will see the amount paid in tax and national insurance, but to claim any allowances requires them to submit a self-assessment tax return. For most PAYE taxpayers, this simply doesn’t seem worthwhile.
Yet, self-employed taxpayers can claim for things like travel to their place of work, a proportion of living expenses when working from home, even their lunch. These things are necessary for productive work yet, for PAYE taxpayers, come out of their already taxed income. Meanwhile, businesses tend to make use of every tax allowance available to them.
This imbalance could be rectified with Open Finance connected to tax software. As MTD becomes a validated system for self-assessed taxpayers, a new version could be developed for PAYE taxpayers, putting them in control of their tax and finances. Not only would they be able to benefit from Open Finance in the same way as self-assessed taxpayers, but they will also be able to claim for reasonable allowances. What’s more, HMRC/the Treasury/the government would be able to hold employers accountable for pay disparities and unreasonable tax avoidance.
Open Finance, then, has the power to speed up and reduce the cost of obtaining and providing finance. It would make the finance system fairer and most transparent while distributing financial power, and help to avoid the creation of too big to fail financial institutions and the boom-bust cycle that has become unfortunate features of modern capitalism.
Ultimately, Open Finance has the potential to help the UK and other nations recover from the seemingly unending series of crises that have plagued the early 21st century by allowing people to access finance quicker in order to grow their business and personal finances while reducing risk, inefficiencies, and costs.
Three ways payment orchestration improves financial reconciliation
By Brian Coburn, CEO or Bridge,
When Luca Pacioli, the 15th century Venetian monk, invented double-entry account keeping, managing financial reconciliations had its own unique challenges. The father of modern accounting didn’t have to deal with glitches in his book-keeping app but he did have to write with feather-based quills by candlelight. Five hundred years later the challenges are different but no less onerous.
As in the 15th century, solid financial reporting is at the heart of every successful high-transaction business. As Pacioli no doubt knew, up-to-date, well-documented accounting ensures good operational health and makes it easier to grow. And that’s never been more important.
While it might not be feather quills by moonlight, today’s environment of multiple customer channels can be time-consuming and labour intensive, with various payment methods and financial reconciliations from multiple data sources.
Understanding cash inflow through online transactions is a critical element of financial reporting. However, when these involve multiple payment processors and payment methods and a complex system of disjointed silos of payment data, this can become a cumbersome and arduous manual task.
Common issues in this fragmented payments landscape include working across different formats, managing different data owners and access as well as inconsistent process timings. The result is often increased inaccuracy and inefficiency. Procuring multiple tools and software can end up being uncost-effective and unwieldy. Though the current digital transformation is an exciting time for retailers, staying on top of the ever-changing payment options can be an overwhelming burden for many business owners.
Introducing payment orchestration presents a single, accessible, creative and accurate source of transactional data, crucial for today’s complex challenges around financial reconciliations.
Today, commerce is 24/7, so being able to access and analyse real-time information is vital to managing business controls. Many organisations have looked to automate these processes with account reconciliation software.
However, one key challenge is the sheer volume of transactions and the need to capture data from a variety of different sources. Payment orchestration enables transactions to be carried out by multiple payment processors and payment methods with simple and flexible plugins, centrally monitored and routed in the most optimum way.
It allows users to add or remove providers easily, knowing the complexity (detecting outages and automatically rerouting payments) is being handled by a trusted specialist partner via an intelligent platform.
Bringing disparate sources of online transaction data into one place simplifies how enterprises access and operate with multiple payment processors and payment methods. This makes it easier for businesses to remain agile.
For organisations that still depend on manual, spreadsheet driven processes, the mechanics of reconciliation can be extremely time consuming.
A payment orchestration layer creates the opportunity to automate processes and reduce manual intervention. By bringing multiple payment processors and payment methods into an integrated service layer with intelligent routing capabilities, the impact of individual outages or failed payments can be mitigated to ensure optimum payment success rates, saving crucial revenue.
Naturally, significant manual work brings with it the added risk of human error. The speed with which business moves today demands accurate accounting processes. Checking for error takes up valuable time that could be spent focusing on business growth.
Payment orchestration can improve accuracy and reduce the opportunity for error. Providing a holistic and central source of real-time transactional data, payment orchestration can offer improved transparency and greater visibility of financial data.
With all transactional data captured in one source, payment orchestration can present a data source to feed other applications – such as automated reconciliation tools and fraud management – automating business processes in a seamless way across the enterprise. Good practice like this will, of course, enable a consistent approach to fraud management across all channels and payment services.
Multiple payment choices can be onerous but, today, not adopting them at all is unwise. The key to success, and good financial reconciliation, is being able to streamline and manage them.
Former Bank of England Governor Carney joins board of digital payments company Stripe
By Kanishka Singh (Reuters) – Mark Carney, former head of the UK and Canadian central banks, has joined the board...
Airbus CEO urges trade war ceasefire, easing of COVID travel bans
By Tim Hepher PARIS (Reuters) – The head of European planemaker Airbus called on Saturday for a “ceasefire” in a...
Why a predictable cold snap crippled the Texas power grid
By Tim McLaughlin and Stephanie Kelly (Reuters) – As Texans cranked up their heaters early Monday to combat plunging temperatures,...
UK could declare Brexit ‘water wars’ – The Telegraph
(Reuters) – Britain could restrict imports of European mineral water and several food products under retaliatory measures being considered by...
Commerzbank to lose 1.7 million clients by 2024 – Welt am Sonntag
FRANKFURT (Reuters) – Commerzbank expects to lose 1.7 million customers by 2024 as part of its current restructuring, resulting in...
Bitcoin and ethereum prices ‘seem high,’ says Musk
(Reuters) – Billionaire CEO Elon Musk said on Saturday the price of bitcoin and ethereum seemed high, at a time...
Sunak to raise business tax to pay for COVID-19 support – The Sunday Times
(Reuters) – British finance minister Rishi Sunak is set to increase a tax on business to pay for an extension...
FTSE Russell to include 11 stocks from China’s STAR Market in global benchmarks
SHANGHAI (Reuters) – Index provider FTSE Russell will add 11 stocks from China’s STAR Market to its global benchmarks, according...
Foxconn chairman says expects “limited impact” from chip shortage on clients
TAIPEI (Reuters) – The chairman of Apple Inc supplier Foxconn said on Saturday he expects his company and its clients...
Bitcoin, ether hit fresh highs
SINGAPORE (Reuters) – Bitcoin hit a fresh high in Asian trading on Saturday, extending a two-month rally that saw its...