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Small and medium-sized enterprises
Does more information increase the flow of credit between businesses?

An international study supported by ACCA reveals the importance of trade credit and the global differences in accessing it. This was discussed by attendees at an event to launch the research report SMEs, Financial Reporting and Trade Credit: An International Study.

Discussing the motivation for the research, Jill Collis, Director of the Accounting and Auditing Research Centre at Brunel University, said trade credit is a more important source of liquidity for SMEs than bank lending, yet receives much less attention. The report looked at how businesses in Finland, the UK, the USA and South Africa use information, especially from financial reports in order to provide their customers with trade credit. 

The research revealed the credit worthiness of customers was assessed on both financial or ‘hard’, and non-financial or ‘soft’ information. Soft information included relationships and trust, word-of-mouth and the track record of the customer. The importance of soft information varied, driven by cultural and more regulatory factors but was particularly high in developing countries where public and private institutions were less established. 

Professor Jarvis, ACCA special adviser, noted: 'What was evident from the research was the reliance of trade credit for SMEs in the early part of their lifecycle – and the gap that opens up later in life when growing businesses are still unable to access bank credit, yet are also unable to scale up the easy, direct and personal access to trade credit they had early on.'

The discussion highlighted across the different countries, that culture played huge importance in what was deemed acceptable when deliberating terms of credit agreements. In the USA for instance, private companies are unwilling to release any information unless asked – an attitude participants had also come across in Europe, particularly Germany. US business people were prepared to give their financial statements to the bank, but not ordinarily to customers or suppliers. 

Competition and disclosure

This research bears particular relevance in the UK where a consultation is currently underway on opening up access to the banks’ credit data on SMEs, in order to stimulate competition in the lending market. Throughout the course of the discussion it became apparent that increasing the supply of raw information is not necessarily the answer, because in some instances it can offer a competitive advantage to the borrower’s customers and competitors. Attendees agreed it is about the right information as opposed to the volume and breadth of information.

High on the discussion agenda were the merits of systems such as the USA’s, where in the absence of formal disclosure obligations trade credit decisions are dominated by company and individual credit ratings, versus that of Finland, which benefits from near-total transparency via public registers. These were in turn compared to the UK requirement for companies to list information with Companies House. Attendees contemplated whether increased disclosure placed an unnecessary burden on SMEs or increased their chances of accessing finance. 

Ultimately, participants conceded even private credit ratings rely on a mix of voluntary and mandatory disclosures. Moreover, it was stressed repeatedly these disclosures are not a burden but genuinely create value, because in their absence the informal ‘market’ for trade credit breaks down. Finally, it became clear that confidentiality, not cost, is the main concern of SMEs when it comes to public disclosures. 

The issue then is whether debtors and creditors are better served by public financial statements as opposed to the ‘black box’ approach of credit scores, and how the process of providing the necessary information could become more cost-effective for SMEs. 

Find out more about ACCA’s SME work.

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