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SMEs - Mitigating The Downturn In Availability Of Credit Terms


By David Shirt

Banking experts at national law firm, Irwin Mitchell, are calling on SMEs to investigate other options including invoice financing to help meet their working capital requirements - rather than relying on trade credit, which often is not available.

The announcement follows research by Experian which show that the percentage of smaller firms accessing trade credit - a financial arrangement where a business allows its customers to obtain goods and pay an agreed number of days later - has fallen to 6.1% from 10% in 2008. As part of the report, Experian described trade credit as a ‘lifeline’ for SMEs and said larger businesses needed to review their approach to the current terms they offer.

Jon Bew, partner in the banking and finance department at Irwin Mitchell said: “The fall in the number of businesses accessing trade credit is not really surprising. No business is automatically entitled to open account credit. Credit terms are offered based on a supplier’s, or their credit insurer’s, assessment of the risk that any given buyer poses of not paying for the goods or services supplied. 

“It is generally recognised that new start businesses have a higher failure rate than established businesses and that small businesses are generally perceived as being a higher credit risk than their larger contemporaries.  Accordingly, the ability for small and new start businesses to get credit terms is limited, particularly in these difficult financial times. 

“Whilst one cannot force a supplier into offering credit terms, there are mitigants to the consequent financial impact.  Invoice finance is a well-established working capital solution and it is worthwhile noting that the Government is expected to expand the £80billion Funding for Lending Scheme to specifically target banks that lend to small businesses. Invoice finance houses and leasing firms will be included within these new arrangements.

“We have also experienced a significant upturn in lenders approaching us to start, or expand, their supplier finance offering, with a number of them looking to include SMEs within those programmes.  That is another attempt to provide credit to a significant section of businesses that is presently starved of it.”