SMEs suffering from reduction in trade credit

HARD-pressed small and medium-sized enterprises (SMEs) are facing a significant reduction in trade credit according to a survey by information services company Experian.

It has found that available trade credit – where a business allows its customers to obtain goods and pay an agreed number of days later – has reduced by an estimated £4.7bn since 2009.

Given recent improvements in business insolvencies and payment performance among firms, Experian is encouraging companies to consider extending much needed trade credit terms to their customers.

Before 2009, trade credit and overdrafts were the most flexible and popular ways for SMEs to access short term funding and manage cash flow. Traditional trades (such as building and construction) in particular often rely on this to buy equipment and materials in advance of their jobs.

Figures from Experian show that trade credit has fallen among businesses over the last few years and still remains at an all-time low. The proportion of SMEs accessing trade credit stood at 10% in 2008, but fell to 9.2% in 2009. It now stands at 6.1%. This equates to a £4.7bn fall in the amount of credit available to SMEs between 2008 and 2011. 

Max Firth, managing director, Experian Business Information Services, UK&I said: “Trade credit can be a lifeline to SMEs who often rely on it to buy materials for the job. 

“Businesses dealing direct to trade need to consider the benefits to their organisation  of offering credit terms, particularly to smaller, sound businesses that just need short-term support to avoid denying themselves the opportunity to grow through new customers and sales.

“We are not advocating that businesses throw caution aside. Simply take steps to ensure that they are fully informed on their customers and suppliers’ current situation, so they can mitigate risk and make informed decisions about how much trade credit they can offer to whom with confidence.”