The 'soft information' behind SME credit

A new reportfrom the ACCA looks 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.

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 businesspeople were prepared to give their financial statements to the bank, but not ordinarily to customers or suppliers.

The report, SMEs, Financial Reporting and Trade Credit: An International Study , examines the hurdles SMEs face in accessing 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.

The international study was supported by the Association of Chartered Certified Accountants (ACCA), which has 162,000 members and 428,000 students in 173 countries.

The 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.

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.

The issue 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.