Trade Credit, Cash-flow and SMEs in the UK, Germany and France

Abstract

DR. FRANCIS CHITTENDEN IS SENIOR FELLOW in Business Development and Director of Business Development Programmes at Manchester Business School and Richard Bragg is a Senior Lecturer in Law and Business, University of Manchester, England. This paper is based on the analysis of the detailed accounts of 1200 small firms in the United Kingdom and 250 business (each) in Germany and France. Following the recent policy debate, at both the national and European level, the main objective of the work was to assess the impact of late payment of suppliers' invoices on the operating cash flow of small businesses in order to achieve two major objectives first, given the existence of a 'finance gap' which acts as a barrier to the growth of many small firms, to quantify the scale of the impact of potential reductions in credit terms on business cash flows; second, to determine the proportions of small companies which would benefit or suffer from faster payments made by their customers and to their suppliers. The paper concludes that for most of the small firms examined, in all three countries, reductions in the trade credit cycle would result in improved cash flows, in the short-term, and lower requirements for future investment in working capital if sales increase, in the medium-term.