Business to business lending fell in the aftermath of the global financial crisis, according to an analysis of trade credit trends by Dun & Bradstreet. The study also found that deteriorating terms make executives nervous about extending credit to their customers. The trend is likely to act as a drag on Australia's economic performance and present as a considerable headwind for the global recovery.

Dun & Bradstreet is the world's leading provider of commercial credit data with information on more than 170 million companies worldwide. The trade credit analysis is the first of its kind ever released in Australia.

The Dun & Bradstreet data reveals that during the height of the global crisis the amount of trade credit extended rose dramatically as firms' increased their reliance on suppliers as a source of finance to sustain their purchases in the absence of bank lending. Suppliers agreed to this increased amount of trade credit fearful of losing customers or even ultimately sending those customers to the wall.

During the 2008 financial year the amount of outstanding trade credit in Australia exceeded $190 billion. This was followed in the 2009 financial year with total outstanding trade credit exceeding $166 billion.

For the most part creditors were rewarded with improved payment terms during the crisis as creditors sought to pay suppliers on time and keep credit lines open. At the peak of the GFC business to business payment terms in Australia actually improved, declining to around 50 days; their best level in more than seven years. These improved payment terms afforded creditors the opportunity to lend more often, lubricating business activity in Australia.

However, as the GFC receded payment terms began to deteriorate. Average payment terms began to creep out to 55 days and the amount delinquent began to rise. The Dun & Bradstreet analysis reveals that the average amount of trade credit overdue jumped to 30 percent after an average of just 12 percent in the preceding two years during the GFC. Most recently, in the December quarter of 2010 the number of firms that were severely delinquent in their trade credit payments (90+ days due) jumped 7 percent.

As a result the overall amount of trade credit extended declined dramatically as creditors adjusted their lending habits to the new risk environment. In the 2010 financial year the amount of outstanding trade credit dropped to below $70 billion, which was less than half the outstanding amount at the height of the crisis.

The new data has important implications for the business outlook given the role of trade credit as the largest source of short term finance for firms and its link to business health. Independent research in the United States has identified Dun & Bradstreet's trade payment data as the most important variable in predicting firm failure; an outcome confirmed in Australia by the 23 percent jump in business failures during 2010 that correlated with the rise of trade payment delinquency.

Additional research from the US reveals that firms with access to trade credit during the GFC experienced a smaller decline in sales than firms that did not. In the case of exporters the research found that they had less access to trade credit on average than domestically focused firms during the GFC, a result that had a disproportionately larger impact on international trade trends than other types of credit.