Eurozone firms adapt to tightening finance conditions

The European Central Bank (ECB) has confirmed a "sharp tightening of financing conditions" in its latest half-yearly survey on companies' access to financing in the euro area.

In the ECB’s most recent Survey on the Access to Finance of Enterprises (SAFE), which covers the six months to March, 87% of firms report a rise in their bank interest rates. This is a worsening of 16 percentage points over the previous half-yearly survey.

According to the overall indicator compiled by the central bank, which captures changes in bank interest rates alongside other financial costs such as expenses, fees, and commissions, the sustained deterioration in financing conditions affects 47% of euro-area firms, the highest percentage since the survey began in 2009. The deterioration is more pronounced in Spain and Italy than in other countries.

On the plus side, the ECB found that the impact of this tightening of financing conditions is alleviated to some extent by the "context of a continued increase in turnover".

For the time being, the proportion of financially vulnerable firms remains broadly unchanged: according to ECB calculations, 5.8% of euro area firms have experienced major difficulties in managing their business and repaying their debts over the past six months.

These vulnerable firms must simultaneously report lower turnover, declining profits and a rising or unchanged debt ratio, in addition to rising financial costs.

The net percentages of companies with difficulties in obtaining bank financing also remain stable (5% of large companies and 9% of SMEs). But looking ahead to the next six months, euro area firms, especially in Germany, Spain and France, expect a worsening in the availability of bank loans and credit lines, which they hope to compensate for by improving the availability of internal funds.

What does this mean for businesses?

We predict that inflation will stay higher for longer and will only come down towards target gradually over the course of the next one to two years.

Despite this gloomy outlook, we have also found that businesses in Europe are optimistic about growth expectations. In our recent survey - the Atradius Payment Practices Barometer 2023 - 63% of businesses polled in Western Europe about prospects for growth in the year ahead expect a strong improvement in demand. This compares to 55% in Eastern Europe.

But with reduced access to finance and increasing interest and input production costs, how is this funded?

Our findings are that businesses are redesigning their financing strategies and turning more to trade credit as a source of short-term financing.  By trade credit, we mean using longer credit terms to encourage sales and also extending the period of time before settling payments due, to fill short-term liquidity gaps.

Our survey found that more companies have used trade credit to purchase goods or services over the past 12 months than any other source of finance, and the number is rising.

In Western Europe, 47% of respondents had used trade credit, while only 36% had taken a bank loan. In Eastern Europe, the equivalent figures were 46% and 44%.

How likely is a wave of payment defaults?

Extending payment terms and paying later creates a tight balancing act for businesses.  In these circumstances, it is inevitable that some companies will find paying their bills more difficult in the coming months.

Trade credit is a way for companies to free up cash in the short term, in expectation of profits further down the line. In good times, it can be a sensible solution for both buyers and sellers. But its growing use during a period of prolonged economic turbulence suggests more businesses are focused on simply keeping the lights on and could end up struggling to pay bills.

With more financially stretched customers taking a “buy now, pay later” approach, sellers are highly exposed to the possibility of delayed payments and defaults.  

In this context, companies need to be acutely aware of changes in the commercial credit risk of their own customers and prepare accordingly. If the ECB is right, firms’ access to more secure and longer-term finance options may reduce further in the coming months. The likelihood of payment delays, defaults and even insolvencies will only rise as a result.

Delaying investments: a worrying trend for the mid-term outlook

With a focus on solutions to plug liquidity gaps in the short-term and reduced access to finance – what is the outlook for the mid-term?

“When companies struggle to access traditional finance like bank loans, they have a number of options,” says Dimitri Pelckmans, Head of Risk Services Belgium and Luxemburg at Atradius. “They may put expansion or investment plans on ice. They may slow production. These ‘solutions’ keep cash in a company but make the business less efficient and profitable in the longer term”.

With a variety of challenges facing businesses; increased cybersecurity risks, clean energy transition, skilled labour shortages, unexpected large swings of input production costs, ongoing geopolitical developments affecting supply chains, along with growing competition and increasing sustainability regulations and compliance to name a few, businesses need to keep an eye on the years ahead.  As well as surviving the short-term challenge, failing to invest for the future now stores up more challenges for the mid-and long-term outlook.