Trade Credit Market Facing Problems

Jan. 4, 2008
Insufficient cash flows

The trade credit markets are now facing the same problems as the rest of the country's credit markets as more companies find it difficult to pay their bills due to insufficient cash flow, according to trade credit insurer Euler Hermes ACI. As growth in the nation's manufacturing sector was trumped by a sharp contraction in the service sector, Euler Hermes credit index dropped to its lowest point in its more than five year history.

"While the manufacturing index actually gained slightly, it was overshadowed by a sharp loss in the service index," Daniel C. North, chief economist at Euler Hermes ACI explained. "The deterioration in the combined index matches that of other major indicators in the macroeconomy, including disappointing holiday sales, a weakening employment market, accelerating declines in housing prices, downgrades of banks and insurers, plummeting consumer confidence, and a rapid increase in delinquencies and defaults on many types of credit.";

In their monthly commentary regarding a national survey of credit managers in the manufacturing and service sectors, survey data showed a decline for the fourth consecutive month in December and dropped to a record low. Six of the 10 survey components fell, including a 4% drop in dollar collections.

North said the data suggests that "at least for the month of December, manufacturers' customers are being less aggressive about holding on to their cash."

Survey respondents confirmed that business bankruptcies across the country are continuing to rise, and that increase -- coupled with declining sales and increased dollar amounts placed for collection -- show that the nation's business conditions are indeed worsening. "It would appear that trade credit managers are now encountering the same difficulty found in other credit markets -- the inability of debtors to pay their bills due to insufficient cash flow. The survey data suggests that indeed more business than usual are having a tough time surviving in this environment as sales and cash flow dry up," he concluded.

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