Print this article | Return to Article | Return to CFO.com
A key indicator of credit availability makes a big jump.
Sarah Johnson, CFO.com | US
February 4, 2011
Trust is returning to business partnerships. Suppliers are increasingly granting credit to their customers, according to the latest monthly report by the National Association of Credit Management (NACM).
For the manufacturing industry in particular, the NACM says credit access for trade customers has returned to prerecession levels. Indeed, the association, which surveys about 1,000 trade credit managers in the second half of each month, believes that credit availability has recently made a "startling improvement." The NACM's indicator for the amount of credit extended in the combined manufacturing and services sectors jumped from 61.7 in December to 64.8 in January (see chart below). That's the highest level for this indicator — one of 10 factors making up the association's monthly credit managers' index — since January 2007.
Part of the reason for suppliers' loosening up is that their bankers are extending them more credit as well, notes Chris Kuehl, the NACM's economic analyst. Manufacturers tend to receive more leeway from their lenders during the beginning of an economic recovery since they can post collateral against their loans, he adds, unlike some of the other businesses the NACM categorizes as services, such as transportation.
Moreover, suppliers don't want to risk losing sales to more-trusting competitors. Unlike the all-too-recent past when credit was shut down from all sides, suppliers are now more willing to give credit because they fear that another company will get the business if they don't offer a financing option. "Everyone has been waiting and looking at each other to see who will go first," says Kuehl.
Still, as with other positive economic indictors, small businesses may be the last to feel this change. Only 5% of small-business owners saw their suppliers' trade-credit policies eased last year, according to a report by the National Federation of Independent Business released on Wednesday.
Other measurements in the NACM's report further show that companies are poised for growth. The overall credit managers' index score of 56.4 for January is at a level that signals "more rapid expansion in the near future," the trade association says. An index reading above 50 indicates the economy is in growth mode. The nine-year-old index hit its lowest point, 39.7, in January 2009.
Also for January, the NACM found that creditors are rejecting fewer applications and have had to move fewer of their accounts to collections. Sales and new credit applications have recently slid, but the NACM says the numbers are still decent and reflect a normal slowdown during this time of year.