Jul 2020 | Risk Analytics

The importance of Trade Credit and the impact of Covid-19

B2B businesses are a substantial contributor to the UK economy. It’s estimated that 40% of UK businesses derive all or most of their revenue from B2B trade, and a further 42% of businesses derive at least some of their income from it¹. This huge portion of the economy is also more susceptible to the trade credit risk inherent in offering longer payment terms.

Despite the risks, 37%—2.18 million—of SMEs took on trade credit last year, up from 31% in 2014¹. The value of credit offered is also seeing significant growth. The total value of UK B2B sales on credit in October 2019 had increased by 17.5% since 2018.² Rather than falling out of fashion, the market for payment terms seemed to be growing.

However, demand from customers and competition from other suppliers has left many B2B businesses in a cycle of uncertainty, exposing them to risk and disrupting (or stopping) the flow of business.¹ The pandemic has put further pressure on trade creditors as businesses have been paying their suppliers slower, meaning an increase in days beyond terms.

To provide a level of support it has recently been announced that the Government will provide guarantees of up to £10 billion to Trade Credit Insurance schemes for business-to-business transactions³. Trade credit insurance guarantees the invoice, but the claim payout can be anywhere from 60 to 120 days after the invoice went delinquent, leaving suppliers with another cash flow gap.

Trade Credit Insurance underwrites an estimated £350 billion of economic activity of more than 630,000 businesses in the UK each year⁴. Therefore the £10 billion Government guarantees and other alternatives such as invoice finance only partially address the financial challenges SMEs face, which is greater now than ever. Many businesses rely on trade credit to operate, which is why as a trade creditor it’s important to effectively manage your portfolio; to continue to support your customers as best you can and keep the market thriving.

Gauging the impact of Covid-19 on the financial health of your customer base

UK businesses have been hit hard by the impact of Covid-19 with an instant shock to their income as they’re faced with lockdown, supply disruptions and businesses taking longer to pay. Businesses who are paying over slower terms tend to be in sectors likely to operate under trade-credit agreements, and therefore are experiencing an increased burden across their business. As a trade creditor it’s important to monitor these sectors in order to identify if this slowdown in payment is a consequence of an unstainable burden on the company. Naturally, this also has a knock-on effect across the supply chain too – and therefore through effective monitoring, you can understand the exposure and risk concentrations in your portfolio.

The shock to these businesses is highlighting the importance of having the controls and measures in place to manage your portfolios using more dynamic tools, data and insight to assess immediate and longer-term stress, which is now more important than ever before. We have recently introduced a new Commercial Volatility Index, which is a short-term index enabling lenders to accurately assess the commercial viability of new and existing customers.  It enables lenders to identify early signs of stress in a business leading to the potential for payments to be missed or defaulted on and how that business ranks against the overall UK small business market. Using it with Commercial Delphi or other Experian risk scores is already proving successful in enabling lenders to make timely, accurate and well-informed decisions when it comes to supporting SMEs. By proactively managing your trade credit portfolio, you can support businesses to continue trading, without putting a strain on cash flow or needing to access formal business finance.

Using data insights such as Commercial CAIS, CCDS, CATO and Days Beyond Terms, allows you to define a picture of stress within your portfolio and gain insight in to potential customers’ financial health. Knowing which are under severe stress and those who are opportunity risk customers will allow you to alter terms accordingly to protect the business, manage limits, and bad debt position.

Automating decisions based on data insights allows you to reduce operational costs, with reports of a 50% reduction in the cost of onboarding, increase basket size and respond quickly to customers; allowing resource to be focused on high value customer activities.

Breadth of data is essential

Access to more in-depth data, more frequently can give you some much needed clarity at a time when traditional models and assumptions are being challenged. We recommend using the full breadth of data available, both in-house and externally sourced, to get as comprehensive a picture as possible of existing customers and new business applicants. Metrics like credit and debit turnover ratios, trends in minimum balances over time, and payment delays can offer a much more accurate view of a trade customers’ status than relying solely on traditional scores.

When faced with a global pandemic, the economic impact to each country is unique. Having access to international insight is more important than ever. Our international commercial credit risk reports enable you to gain a deeper understanding of your international customers, associated risk and their history through real-time reporting.

Recency of data

It is imperative you are using the most up-to date insight in order to perform analysis. In unprecedented times like these, disrupters such as the coronavirus is not following a neat timescale of evolution. As such, being able to access data that is up-to-date and current, can be imperative to helping you mitigate risks in near real-time.

Quality of data

It’s a well-coined phrase the need for a single customer view, but truly – it’s important. At Experian, we receive multiple records for the same consumer from different sources. Even though the records are for the same business, variations in names and addresses, misspellings, or inaccurate dates of birth, as well as the use of different formats, mean the data items might not be an exact match. Our unrivalled technology cleanses the data frequently, ensuring the quality is robust, and you access the best possible 360-degree view of your customers.

How Experian can help you to drive proactive portfolio management and better serve your trade credit customers

Here at Experian, we’re committed to sharing our data and insights to help you understand the changing landscape and where your concentrations of risk are, as well as unearth new trends. SMEs account for three fifths of the employment and around half of turnover in the UK private sector⁵ and many rely on trade credit to continue to operate. Experian’s breadth of data and innovative capability suite can give you the most accurate view of your trade credit customers, allowing you to take proactive decisions and actions, to support both opportunity and risk customers.

¹ https://downloads.ctfassets.net/835lsoe3tdrh/1idqLtdxPyf8Npi7DnjkKi/c5497a4b106a1ff3386019feac82604d/iwocaPay_____Levelling_the_paying_field.pdf

² Payment Practices Barometer 2019

³ https://www.gov.uk/government/news/trade-credit-insurance-backed-by-10-billion-guarantee

⁴ https://trans.info/en/uk-trade-credit-insurance-backed-by-10-billion-guarantee-hauliers-welcome-the-pledge-187717

⁵ https://www.fsb.org.uk/uk-small-business-statistics.html