Monday 2nd June, 2014

The amount owed to UK businesses by way of late payments amount to the largest form of credit in the economy according to a new report by Leeds University and Taulia. The report says that this serious threat to the UK economy calls for 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 credit is 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.

“Trade credit is being used as a blunt instrument by many companies, with outdated practices poorly adapted to today’s new economic environment,” said Jon Keating, European Managing Director at Taulia.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 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.

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 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.