ACCA has joined a partnership of professional bodies formed to promote a new approach to cash flow management by UK businesses, after research revealed a £75bn trade credit gap which could threaten the long-term survival of SMEs
Trade credit is now the biggest single source of finance to UK business at about £327bn, 20% larger than the size of bank credit, according to analysis from financing software company Taulia.
Unlike previous post-recessionary periods, the research indicates the gap between the total trade creditors and total trade debtors widened 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.
Wilson said: ‘The analysis shows that the UK faces a very different business debt challenge in this recovery, one which will require a new, proactive, management approach to the use of trade credit if businesses are to thrive and survive.’
The study warns that the trade finance gap could result in an increased rise of insolvency. While trade credit represents about 20% of total borrowings for large firms, for small firms it is over 90% and, is often the only source of finance. The figures suggests that reducing delays in payment could release substantial amount of working capital for businesses, calculating that each improvement of five days would release an additional £29bn of working capital for all companies, over £7.7bn of that for SMEs.
The research is based on analysis of 15m limited company reports filed between 1998 and 2012, conducted by professor Nick Wilson of the Credit Management Research Centre.
Jon Keating, European managing director at Taulia, said: 'Trade credit is being used as a blunt instrument by many companies, with outdated practices poorly adapted to today’s new economic environment. We believe this is a serious threat to the UK economy.’
In response to criticism of bad practice, key players across the industry have set up the Trade Credit Improvement Consortium, bringing together ACCA, the Chartered Institute of Purchasing and Supply (CIPS) and the Institute of Credit Management (ICM), as well as commercial partners including Taulia, to help buyers and suppliers transform their trade credit practices.
The Consortium is developing a practical tool kit to enable businesses and their advisers to evaluate their trade credit practices and improve access to this type of funding. Details are available from www.securetherecovery.co.uk
