The media is full of advice to banks and government on what to do about the recession. Most people agree that the banks should step up lending to credit worthy businesses so that economic growth can get under way.

Some of the banks are reluctant to do so, preferring to use Government support to rebuild balance sheets and lend only to ‘blue chip’ businesses.

But another area is frequently overlooked by the media – the expansion of trade credit. An estimated 80% of all transactions take place on open account and if this percentage could be expanded on a secure basis, the effects on the UK economy could be beneficial indeed.

Moreover, much of the credit granted is normally given and received by businesses broadly described as SME’s. Yet this is the sector least well prepared to do so. Only a minority of small businesses boast a professionally qualified credit manager and in many cases where one is in place, he or she faces a constant battle within the business with an aggressive sales arm (sometimes even the MD) determined to achieve sales at all costs. Frequently there is no
properly formulated credit policy and credit granting takes place in a a vacuum quite independent of the overall objectives and targets of the business. The consequence is obvious – bad debt and poor collections.

In some ways this is surprising. Since the recessions of the 1980’s it has become far easier to reconcile the effective granting of credit with controlled sales expansion. Comprehensive on line
credit information is available to all sectors of the market at a reasonable price. Training in credit management, through the efforts of such organisations as the Institute of Credit Management, has become far more widely available. The number of outside agencies concerned with credit management has mushroomed – factors, discounters, debt collection agencies, are all selling their services to the people on the industrial estates who are the backbone of the economy.

Yet, at CPA we see daily evidence of weak credit management. Goods and services get supplied on open credit to companies who are illiquid to the point of insolvency. Credit limits are ignored or the level of credit is allowed to grossly over run. Invoices are raised on incorrect corporate names or trading styles. Then there is frequent failure to pursue due debt with urgency or to deal with disputes effectively. And so on.

We do what we can to help by giving advice and support.  To some extent the debt purchase service that we offer, provides a framework for effective credit control as it require clients to chase debts and submit them for purchase in a timely way, and then show reasonable care and prudence in granting credit

But of course the scale of the problem is such that it is way beyond the ability of any one organisation to influence it. And it makes you wonder about the extent to which people are missing opportunities to sell to well established and profitable businesses because of an inability to obtain and interpret data. Of course, poor credit control goes hand in hand with indifferent management and sales practice.  How many credit granters are trained to look hard at the figures contained within a credit report rather than simply accepting the credit limit indicated without further analysis – or indeed discussion with the customer? How often do smaller businesses use the copious on line material available these days to market and sell as well as to credit check? Some do of course, but judging from every day experience they are in a minority.

So what to do? The problem is one that will not be solved in the short term and is certainly beyond the scope of government, The inherent ordinariness of the credit management function means that all too often it does not attract high flyers. It is probably the case that a majority of the better trained credit professionals are employed within the financial sector rather than within industry. Yet the importance of cash flow within industry has never been higher and from a lenders perspective, the debtor asset is often the most significant.

So perhaps, here is a way in which the financiers can help to repair some of the damage that has been done to the UK economy in the past two years, By developing advisory services to industry and more important, linking the provision of financial facilities and loans to competence and performance as opposed to old fashioned security they can play their part in raising standards in British business.

Factors and discounters have always made judgements about the quality of a debtor book before granting facilities But these judgements have not always extended to any serious analysis of the people running the sales and credit operations – and lending bankers often have very little idea as to the quality of the people involved, relying purely on formulaic judgements of the quality of security. Even where there is some analysis of the quality of the management and the processes that exist within the firm, if the assessment is negative, the lender simply declines the business and does nothing more.

If lenders were prepared to spend time and resource identifying and plugging the management and operational gaps that are all too often perceived, they would not only raise the quality of the security they need in order to lend but could also  make a real contribution to economic recovery. 

We can but hope!

Contributed by David Hawkins – CPA    www.cpa.co.uk