Trade credit plunges as businesses worry about getting paid

Trade credit extended by suppliers to customers has plunged from $166 billion to just $70 billion as businesses became worried about payment terms lengthening in the wake of the GFC.

The analysis, from commercial credit data firm Dun & Bradstreet, suggests that many businesses could struggle to access the necessary cash to expand, if trade credit and bank lending remain constrained.

The D&B analysis shows that when banks stopped lending during the GFC, many businesses turned to suppliers to help safeguard their working capital. Suppliers agreed to ensure they did not lose customers, or send them to the wall.

As a result, trade credit in 2008 reached $190 million, before moderating slightly in 2008.

Despite the difficult economic environment, the generous trade credit terms extended to creditors actually resulted in payment terms falling, hitting a low of 50 days at the peak of the GFC.

But in the period since the end of 2009, payment terms have worsened.

While just 12% of trade credit was categorised as being “overdue” during the GFC years of 2008 and 2009, overdue trade credit increased to 30% of total credit owing in 2010.

In the December quarter of 2010, the number of trade creditors considered to be “severely delinquent” and more than 90 days behind on payments jumped by 7%.

Australia’s average payment period currently sit at 52.1 days, three weeks above the standard 30 days term most suppliers use.

D&B chief executive Christine Christian says Australian businesses have undergone a remarkable change in the value they place on cashflow in recent years.

“During the GFC it became evident very quickly that banks were going to curb their lending and they did so in a major way. So companies had to act very quickly to keep their business going and made sure they made payments to suppliers promptly and watched overdue payments closely.”

“I think what has happened now is that businesses are far more acutely aware of the value of cash. They are far more discerning about who they extend credit to and far more diligent about calling in overdue payment.

“Trade credit has been adjusted to the new risk environment.”

The problem is that while trade credit has fallen, bank lending has not increased.

“That really is going to be the big challenge, particularly for small businesses,” Christian says.

She thinks banks will have to return to the market eventually and points to the recent announcement of incentives to entice customers to switch as proof.

“Banks are realising that businesses are very critical of the adjustments that were made during the GFC. I think we will see that banks will most likely try to find a way to reach out to and provide incentives to customers.”

The D&B analysis also suggests exporters targeting the key markets of the United States, China and India need to factor in very slow payments into their planning.

The firm estimates average payment periods in China and India currently sit at 90 days, with exporters advised to add a further 60 days for conversion and transfer risk.

In the United States payment terms can run as high as 120 days when conversion and transfer risk are added to normal payment delays.