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Trade credit balances fell across eight major European markets in April this year, new research shows, as businesses throughout the continent felt the effects of Covid-19 containment measures.

Trade credit volumes – or the total amount owed by buyers to their suppliers – is driven by a combination of business activity and demand for production among buyers, and the risk appetites of their suppliers.

By looking at trade credit data from 1.4 million companies – the vast majority of which are SMEs – S&P Global Market Intelligence says it is possible to estimate the impact of Covid-19 on the economy in Belgium, Germany, France, Ireland, Italy, the Netherlands, Sweden and the UK.

“There is no doubt the pandemic has slowed down business activity in the eight European countries we analysed,” it says. “From trade credit data, we see the impact of Covid-19 reached these European countries at different points in time and at different levels of severity. “

As the first European country to suffer a major coronavirus outbreak, Italy was initially hardest hit, suffering the steepest drop in trade credit balance between February and March.

S&P attributes this drop mainly to a “slowdown of business in the wholesale and retail sector” after the government imposed a strict national lockdown on March 9.

“Entering into April, all European countries were under different degrees of lockdown or social distancing measures,” S&P continues. “Trade credit balances decreased for all these countries.”

Though that April slump was common across all eight countries, S&P data shows that businesses in the Netherlands, Sweden and UK were the only ones to suffer successive falls in trade credit balances every month between February and June.

Part of that is attributed to when Covid-19 cases started to drop and countries eased lockdown measures.

“When the pandemic started to be brought under control in May, we observed two opposite patterns for trade credit balances: a rebound for Belgium, Ireland and Italy; and a further drop for the remaining countries, which is especially noticeable for France and Sweden,” S&P says.

It adds that data from the following months should confirm whether the relaxation of Covid-19 containment measures is the main driving force behind recoveries in trade credit balances.

S&P also examines whether payments to suppliers were made on time. Generally speaking, the number of late payments increased after January but had largely recovered by April, suggesting buyers had been more able to access working capital.

“This may indicate the success in providing emergency liquidity to the impacted businesses by the corresponding government,” it says.

A drop in outstanding trade credit balances could also indicate greater use of supply chain finance programmes, as buyers are able to extend payment terms while suppliers are guaranteed early payment – albeit typically at a discount.

Arsene Lui, an analyst at S&P Global Market Intelligence and author of the report, tells GTR that demand for supply chain finance “is directly related to the outstanding trade credit balances”.

Providers of supply chain finance in Europe have already reported a spike in demand after Covid-19 placed a squeeze on firms’ working capital.

According to S&P’s ratings division, that is not without its risk.

In a March discussion paper, analysts argued that the use of reverse factoring “could also mask episodes of financial stress by boosting operating cash flow and reducing headline debt numbers”, while also accelerating cash outflows in high-stress scenarios.

Similar warnings have been regularly aired by ratings agencies, though providers of supply chain finance say high-profile incidents of failure are the exception, not the norm, and the product should not be considered equivalent to bank-like debt.