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Understanding the Shift in Trade Credit in the COVID-19 Pandemic


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Understanding the Shift in Trade Credit in the COVID-19 Pandemic

A Case Study on American Small and Medium Enterprises

The unexpected COVID-19 pandemic has severely shocked the global economy. Due to the first nationwide mandatory closure of non-essential businesses in recent history, business owners, especially those of small and medium-sized enterprises (SMEs), in the United States (US) are faced with the challenge of survival. According to S&P Global Ratings in a report published in March[1], supply-chain financing, such as reverse factoring, could mask episodes of financial stress by boosting operating cash flow and reducing headline debt numbers. Further, it can accelerate cash outflows in a stress scenario where the financing is not rolled over or withdrawn.

In this article, we present the results of a study on the trade payables of US companies since the outbreak of COVID-19, aiming to provide a clearer picture on the shift in supply-chain financing activities due to the pandemic, as well as a forward-looking view on companies’ payment behavior.

Research Data

We extract the trade payable balances of 1.6 million US companies for the period between October 2019 and March 2020 from our US Trade Payment Database. 98% of the companies in the dataset are SMEs with less than 500 employees (Figure 1). The balances are reported by creditors (i.e., suppliers) and aggregated at the end of each month. We group the companies into 22 industry sectors in the same way as the Credit Analytics’ quantitative models.Each industry sector has at least 1,000 companies in the dataset, and the top three sectors are Wholesale and Retail, Services for Businesses and Industries, and Capital Goods (Figure 2).

Figure 1: Distribution of companies by the number of employees

Source: S&P Global Market Intelligence, March 15, 2020. For illustrative purposes only.

Figure 2: Distribution of companies by industry sectors 

Source: S&P Global Market Intelligence, March 15, 2020. For illustrative purposes only.

Decrease in Trade Credit

The amount of outstanding trade payables is a straightforward indicator of the change in the trade credit activity. In addition, it can also help us to understand the trend in business activity. We aggregate the amount of unpaid trade payables of each month in Q1 2020 and compare it against the average level in Q4 2019 (Figure 3).

Overall, the March balance is slightly lower than the Q4 average by 0.3%. We observe a significant drop in trade credit for Airlines (−62%), Automotive (−24%), and Transport (−17%), which is consistent with the diminishing demand due to travel restrictions and lockdown policies imposed by many governments. In contrast, a noticeable increase in trade credit is observed in sectors that are experiencing a high demand due to the pandemic, e.g. Chemicals and Industrial Products (+20%), Non-durable Consumer Products (+20%), and Pharmaceuticals (+14%).

Figure 3: Monthly outstanding trade payables, relative to Q4 2019 average level 

Source: S&P Global Market Intelligence, March 15, 2020. For illustrative purposes only.

On the customer side, we expect the economic slowdown will further reduce the demand of some production goods. On the supplier side, companies could be more cautious in granting trade credits due to a higher risk. Both factors together would bring down the overall quantity of trade credits in the coming months.

Growth in Days Beyond Terms

We further breakdown the trade payable balances into five classes according to its overdue status, i.e. current, 1-30 days overdue, 31-60 days overdue, 61-90 days overdue and 91+ days overdue, and calculate the days beyond terms (DBT), i.e. dollar-weighted average number of days overdue, for individual companies. The measure indicates how long it takes a company to pay its suppliers after the due date. We then compute the monthly dollar-weighted average DBT for each sector and benchmark it against the average level in Q4 2019 (Figure 4).

The March average DBT on the dataset is 57 days, which is 5% longer than that in Q4 2019. Although Information Technology and Telecom have a very high DBT in March, it does not deviate from the Q4 2019 level by much. The sectors with the most deterioration in DBT are Airlines (+85%), Automotive (+42%), and Transport (+9%), suggesting a strain in their current liquidity due to the inability to operate their business as usual, while the sectors with the most improvement in DBT are Chemicals and Industrial Products (−18%), Pharmaceuticals (−15%), and Non-durable Consumer Products (−13%).

Figure 4: Monthly average days beyond terms, relative to Q4 2019 average level 

Source: S&P Global Market Intelligence, March 15, 2020. For illustrative purposes only.

Payment Behavior

Although DBT is commonly used in accounts receivable management by suppliers, it does not reliably measure the payment behavior of companies. DBT can be influenced by the rise or drop in the amount of new trade credits. To overcome this issue, we analyze the time series of the trade payable balance and deduce the proportion of balances being paid on time in each month. Again, we compute the sector averages and compare the values against the level in Q4 2019 (Figure 5).

Overall, the percentage of on-time payment decreases slightly from 77% in Q4 2019 to 74% in March 2020. It is interesting to see that although Airlines and Automotive are experiencing a drop in trade credit amount and an increment in DBT, the on-time payment in March (96% & 81%) are still noticeably higher than the Q4 2019 level (54% and 70%). In contrast to this, the on-time payment of Non-durable Consumer Products falls from 85% in Q4 2019 to 60% in March 2020, despite a promising trade credit amount and DBT. It is also worth mentioning that a moderate drop is observed for Financials (77% to 64%) and Telecoms (88% to 76%). Finally, although the on-time payment of Real Estate is still on a par with the Q4 2019 level, the huge drop in March (82% to 66%) may also be a possible red flag for further late payment.

Figure 5: Monthly average proportion of balances being paid on time

Source: S&P Global Market Intelligence, March 15, 2020. For illustrative purposes only.

Last but not least, we use a proprietary statistical model, trained on historical payment data, to generate the on-time payment percentage for the coming month. The model aims to predict the probability distribution of payment time, which can better reflect the payment behavior than DBT. The result, illustrated as blue dot in Figure 5, shows a deterioration in payment behavior across industry sectors and the overall on-time payment would drop to 52%, assuming everything remains as in current conditions.

What’s next for SMEs?

SMEs are trying every possible approach to obtain funding, reduce outflow, and weather this unexpected pandemic. The US government is also providing several relief options, such as emergency loans and financial reprieves, to small businesses under the recently signed CARES Act.[2] If it is effective, we may see an improvement in trade credit and payment behavior in the coming months. However, if the government initiatives fail to achieve their purposes, and the pandemic continues for a prolonged period, we will observe a further contraction in trade credit and more late payment than what was seen in March.

[1] “Reverse Factoring: Why It Matters”, S&P Global Ratings, March 10, 2020.

[2] “Coronavirus Relief Options”, U.S. Small Business Administration,

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