Business-to-business lending rates have declined as creditors get strict about payment terms, according to trade credit analysis conducted by Dun & Bradstreet.
The global credit data provider revealed that during the GFC many organisations relied on extended credit terms from suppliers to stay in business but these terms have retracted since the effects of the GFC eased. The analysis believes this is likely to have a negative flow-on effect to business customers.
According to the data collected, Australian businesses lent more than $190 billion in trade credit in 2008, and lent more than $166 billion to other businesses in 2009.
A surprising result of the relaxed payments terms during this period was an improvement in payment times with invoices being met at an average of 50 days “as creditors sought to pay suppliers on time and keep credit lines open,” noted the report. “These improved payment terms afforded creditors the opportunity to lend more often, lubricating business activity in Australia.”
“Trade credit acted as a viable substitute for many firms during the GFC as bank credit became harder to source,” said Christine Christian, CEO of Dun & Bradstreet. “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.”
Conversely, as the GFC receded payment terms deteriorated, extending to more than 55 days on average. Delinquency—payments overdue by 90 days or more—began to rise.
“As a result, the overall amount of trade credit extended declined dramatically as creditors adjusted their lending habits to the new risk environment,” according to the report. Trade credit subsequently dropped to below $70 billion, less than half of credit given at the height of the GFC.
“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,” said Christian.
As business-to-business lending has become an important source of short-term finance to many organisations, the trend will have significant effects on business health, she concluded.
“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.”
Have you noticed a change in payment terms since the GFC?