A rise in IT industry failures looks inevitable as credit screws are tightened...

Cash is short, and payment delays are set to rise at the beginning of the year, says Head of Studies at Altares, Thierry Millon. It's the same story from Credit Services Director at Bell Micro Europe, Eddie Pacey: "We're expecting a tougher year in terms of business insolvency, but are prepared for it."

"Many of us got away quite lightly in 2009 with actual insolvency and bad debt below expectation," continues Pacey. "There were however reason for this. One was banks had their eyes firmly fixed on their own emerging and dire problems and another a slowing of hardware spend with resultant less pressured supplier credit lines. An additional factor was suppliers more willing to work through short-term cash flow issues. One can also argue that consolidation also meant less companies going to the wall."

Laurie Beagle at the European Credit Forum (ECF) where leading IT company credit managers discuss market conditions says: "In the UK, a lot of companies who did deals with the Revenue last year will have to pay up early in 2010; also a lot of other bills, rent, VAT and December supplies will fall due in the first couple of months and all at the same time."

There is the post Christmas crunch, he thinks. "Large retailers are reporting good/acceptable results; however, this is not the case with the smaller, less-financially sound businesses."

Credit companies Aon and Euler Hermes' figures show that 2009 will have seen a 43% jump in failure in Europe, with eastern Europe jumping some 71%. Western Europe will show more insolvencies continuing into next year.

Contrarily to what we commonly think, explains Millon, payment terms and delays tend to increase more in times of upturn than in times of downturn. "What we've noticed from the crisis and what we can observe on a more general and cultural way is that, in times of crisis, there are extensions, but delays tend to be controlled." This is because the companies who lack cash and can't get money from the banks are going to be much more vigilant that their remaining customers pay their bills on time.

On the contrary, at a time of revival, companies will tend to use their resources to develop their activities and portfolio, to attract new customers and get back to business with the existing ones. "They won't devote as much time and resources to run after the payments. So it's now that we have an upsurge of activity we need to be careful about payment delays," warns Millon.

So in the first quarter, Millon thinks the situation will remain critical. "First, because the upturn is frail, and also because companies have just been through many months of great difficulties." Therefore, although the situation is better and the increase of failures has slowed down (especially for the SMEs, not for the very small enterprises who work on a b-to-c basis), the companies are still going to wait and see that the upturn is really established. "Investment in marketing or even technology will be put on hold, until the climate becomes less uncertain, especially that bankers are likely to remain cautious."

However, according to Pacey, banks are still "tightening their grip and looking to exit investments they no longer feel are likely to deliver a good return". Also, measures such as HMRC's initiative in the UK to give tax payment delays to companies, benefitting to 180,000 businesses and exceeding £3bn (€3.4bn), is a "burden shortly coming home to roost."

In the UK, if payment terms are still around 60 days (when in Spain they're between 90 and 120 days), what's worrying is that, added to these extended terms are new delays that tend to lengthen and have never been known before. "More than 18 days delays is almost twice the 10 days usually seen in the UK," says Millon.

"This is the reflection of a country mainly carried by a frail services economy," he explains, comparing the situation to other countries such as France and Germany where the industrial sector has helped to beat the payment deterioration in the services activities.

Meanwhile, in the South of Europe - Iberia, and Spain in particular - the situation is deteriorating quickly. "Not only do they pay badly, but they're today on historical levels never met before, due to an economy that has difficulties to bounce on the difficulties of the property sector and its ripple effects in the other sectors," explains Millon.

www.altares.fr
www.bellmicro.eu

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