According to Dun & Bradstreet in a report released in late March, business to business lending has declined following a spike during the Global Financial Crisis.
This is due to deteriorating payment terms make executives nervous about extending credit to their customers. Dun&Bradstreet say the trend is likely to act as a drag on Australia’s economic performance and will present as a considerable slowdown for the global recovery, according to an analysis of trade credit trends.
The trade credit analysis data reveals that during the height of the global crisis the amount of trade credit extended rose dramatically as firms’ increased their reliance on suppliers as a source of finance to sustain their purchases in the absence of bank lending.
Suppliers agreed to this increased amount of trade credit in fear of losing customers or ultimately sending those customers to the wall.
During the 2008 financial year the amount of outstanding trade credit in Australia exceeded AUD190 billion. This was followed in the 2009 financial year with total outstanding trade credit exceeding AUD166 billion.
Creditors were generally rewarded with improved payment terms during the crisis as creditors sought to pay suppliers on time and keep lines of credit open.
At the peak of the crisis business to business payment terms in Australia improved, declining to around 50 days; their best level in more than 7 years.
These improved payment terms afforded creditors the opportunity to lend more often, lubricating business activity in Australia.
However, as the crisis receded, payment terms began to deteriorate. Average payment terms began to creep out to 55 days and the delinquency began to rise.
The Dun & Bradstreet analysis reveals that the average amount of trade credit overdue jumped to 30 percent after an average of just 12 percent in the preceding two years during the financial crisis.
Most recently, in the December quarter of 2010 the number of firms that were severely delinquent in their trade credit payments (90+ days due) jumped by 7 per cent.
As a result the overall amount of trade credit extended declined dramatically as creditors adjusted their lending habits to the new risk environment.
In the 2010 financial year the amount of outstanding trade credit dropped to below AUD70 billion, which was less than half the outstanding amount at the height of the crisis.
Dun & Bradstreet CEO Christine Christian says the data shows why the tightening of bank credit during the GFC was not as disastrous for firms as was feared at the time.
“Trade credit acted as a viable substitute for many firms during the GFC as bank credit became harder to source,” said Ms Christian.
“This allowed firms to continue trading even without the use of standard credit lines they had come to rely upon for management of their day to day operations. This willingness by suppliers to extend trade credit was rewarded with improved payment terms that in turn facilitated more lending.
“However, this part of the equation is no longer apparent and the deterioration in payment terms throughout 2010 has resulted in a decline in the amount of trade credit extended.
“Consequently, cash flows have been negatively impacted and the outcome is apparent in the rise in business failures and the increased risk profile of many firms.
“For executives the message is clear. A focus on the fundamentals of credit risk and cash flow is critical regardless of the stage of the economic cycle.”
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