TMCnet News
Does more information increase the flow of credit between businesses? [financeME](financeME Via Acquire Media NewsEdge) Access to trade credit is essential for a large number of SMEs in the GCC region. However, this process is not always as easy as it should be for businesses across the Gulf. The hurdles for SMEs to access trade credit and its importance as a funding tool for SMEs were discussed by attendees at an event by the Association of Chartered Certified Accountants (ACCA) while the group launched its 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 that trade credit is a more important source of liquidity for SMEs than bank lending, and yet receives much less attention. The report itself looked at how businesses in Finland, the UK, the U.S. and South Africa use information, especially from financial reports, in order to provide their customers with trade credit. The research revealed that in all countries, the creditworthiness 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, to name but a few. 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. "What was evident from the research was the reliance of trade credit for SMEs in the early part of their life-cycle - 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," noted Professor Jarvis, ACCA Special Adviser. The discussion highlighted that across the different countries culture played huge importance in what was deemed acceptable when deliberating terms of credit agreements. In the U.S., for instance, private companies are unwilling to release any information unless asked - an attitude participants had also come across in Europe, particularly Germany. U.S. businesspeople were prepared to give their financial statements to the bank, but not ordinarily to customers or suppliers. In the UK, 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 this discussion it became apparent that increasing the supply of raw information is not necessarily the answer as in some instances it can offer a competitive advantage to the borrower's customers and competitors. Attendees agreed "it's about the right information as opposed to the volume and breadth of information." Attendees contemplated whether increased disclosure placed an unnecessary burden on SMEs or increased their chances of accessing finance. Ultimately, participants conceded that even private credit ratings rely on a mix of voluntary and mandatory disclosures. Moreover, it was stressed repeatedly that 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, which many have maintained holds true as well across the GCC. 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. (c) 2014 CPI Financial. All rights reserved. Provided by Syndigate.info, an Albawaba.com company |