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Trade credit will be harder to come by
20-07-2010
ATI Magazine June/July 2010
AMSTERDAM — There is business consensus that the future use of trade credit will grow as bank finance becomes harder to obtain, according to a new White Paper prepared by global credit insurer Atradius.
The ability to provide buyers with credit terms, and, in some cases, extended credit terms, has grown in importance since the
global economic downturn, Atradius says.
The White Paper urges businesses to treat credit as an aid to mutually successful trade, using it to build trust between supplier and buyer. The paper questions the wisdom of either suppliers enforcing cash terms, or powerful buyers insisting on extended credit terms that place their suppliers in a difficult position. It also advises businesses to be absolutely open with credit insurers about their financial information and future plans, as this can open the door to the support they can bring to successful credit transactions. Survey responses for the paper from small and medium-sized entities (SMEs) suggest that they are particularly sensitive to changes in credit terms that could endanger their cash flow – because they have less available capital and access to bank finance than their larger counterparts. The paper urges banks to refocus on corporate lending as an opportunity for generating profits rather than as a risk.
Atradius CEO, Isidoro Unda, says the downturn of the past two years has upset the natural rhythm of trade on credit terms.
“For trade to function successfully, there needs to be trust between supplier and buyer, backed by sensible credit management processes,” he says. “This requires flexibility to adapt to changing circumstances, as well as honesty and openness between all those involved in the transaction — supplier, buyer, bank and credit insurer. Most of the businesses that followed these principles have emerged from the downturn stronger, while those that refused to acknowledge escalating trading risks have fared worse.”
Atradius says it is clear from its research that the dynamics of trade credit have changed as a result of the economic crisis, with more aggressiveness by both suppliers and buyers in the way they behave towards each other.
“At its extreme, such behaviour is perceived to be unethical,” the White Paper says. “Unless this trend is redressed, one conclusion is that this will damage not just long-term business relations but also cash flow — and hamper investment in research and development to the eventual detriment of consumers.
“There is a firmly-held belief among many that the use of trade credit will increase in the coming 12 months to maintain trust with loyal customers, regenerate flagging markets and afford customers time to pay. While this may not accord wholly with experience in recent times, it suggests a recognition on the part of business of the value of trade credit, and an aspiration for such trade to return to equilibrium.”
In preparing the white paper, Atradius drew responses from executives in Australia, New Zealand, Belgium, France, Germany, Italy, the Netherlands, Switzerland, the UK and the US.
Atradius also draws from a Confederation of British Industry paper which predicts that supply chain finance will become a much more important part of future business strategies. “Larger companies will be prepared to finance their suppliers, and smaller firms will look upstream for funds,” the CBI paper says.
“Finance agreements in the supply chain are now perceived by many businesses as less risky than bank lending – as customers, large businesses will have a good understanding of suppliers’ peaks and troughs in demand, and they will also be willing to work with them to ensure
their survival,” CBI adds. Visit http://www.atradius.com.au/images/stories/publications/ Atradius_White_Paper_June2010(1).pdf |
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