Successfully Charting the £75bn Trade Credit Gap

June 2, 2014 Matthew Stammers

london-secure-the-recovery2

From both a personal and business perspective, it is deeply pleasing to see the UK and the broader global economy emerge from one of the worst recessions in living memory. 

Recessions are not some abstract idea, but a practical reality in which thousands experience lower wages, higher cost of living and drastic job losses. So emerging from a recession gives everyone a newfound sense of optimism and hope.

A widening trade credit gap

What IS worrying however, is that this recovery may be under threat from the way in which UK companies continue to work together. 

In the UK that consumer spending is at least partially responsible for fuelling the recovery, but it’s not just consumer debt that we should be concerned about. 

It’s not just consumer debt that we should be concerned about.

A new report, ‘Charting the Trade Credit Divide’, based on independent research by Prof. Nick Wilson of Credit Management Research Centre, reveals UK companies have entered this recovery burdened with a £75bn a trade credit gap. That is, the amount of payments that companies are waiting on from each other is £75bn more than they owe--a swing of £94bn from the last recession in 2004 when companies had trade debt of £19bn.  

Trade credit fuels the economy, not bank lending

So why are these numbers important? 

Quite simply, the providing of credit by non-financial organisations to other organisations (trade credit) fuels the UK economy. Trade credit is more than 20% larger than bank lending at £327bn and it forms 80% of companies’ borrowings. 

In SMEs, this figure rises to over 90%. In contrast to the rising trade credit, bank lending fell by £21bn in March 2014 (British Bankers Association). Trade credit is taking the place of traditional bank lending, so without trade credit, the UK economy would grind to a halt. 

The fact that the gap in trade credit is rising shows that not only are companies using trade credit more as a source of finance, but also in doing so, that they are taking longer to pay what they owe to suppliers. 

Waiting on these payments is putting suppliers under further financial stress and threatening the economic recovery.

What can we do?

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. 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

You can also download a copy of Taulia’s report, Charting the Trade Credit Divide and access the full research report by Prof Nick Wilson.

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