LONDON, April 3 (Reuters) - Many small and medium-sized businesses are under just as much or more pressure from shrinking inter-company credit than from the well-documented tightening of bank lending, UBS said in a report this week.
Economists Paul Donovan, Larry Hatheway and Andrew Cates wrote they had found anecdotal and survey evidence of an abrupt tightening of terms of credit for small companies from suppliers. That tightening has forced small businesses to cut back on inventories, they said.
"We wish to ... argue that the hidden credit crunch is more abrupt than in previous downturns," the report said. "Inventory data from the U.S. and Euro economies certainly suggests a more abrupt shift in inventories amongst small businesses than is typical in even a severe economic downturn."
The tightening of bank lending and drying up of commercial paper markets mean that large companies are finding it more difficult to raise finance, making them less willing to provide credit to customers, the economists said.
Also small companies are better able to manage their inventories because of the lower costs of just-in-time inventory management tools, they said.
If, for example, invoice terms go to 30 days from 45 days, they said, the small business has an incentive to reduce the level of its inventory by a third.
This tightening is likely to be reflected in the shipment of goods, they said, citing data that Asian air freight traffic contracted sharply in 2008.
"Although not conclusive, this evidence does go to support the thesis that changes in inter-company credit may promote a more brutal inventory cycle," they said.
They also pointed to the advertising industry, in which the large number of media outlets compete to supply a few big buyers, and cited anecdotal evidence that large client companies are insisting on 120 days for settlement of invoices rather than the traditional 60.
UBS cited the U.S. NFIB survey of small businesses found that their planned reduction in inventory was more dramatic than during the last economic downturn in 1991, in spite of the fact that the level of current inventory was not considered excessive.
"The key risk is that what is happening now becomes a self-feeding spiral," they warned. "Large companies limit the availability of credit to small companies, but by doing so lead to a short-term reduction in demand for their own product that generates a second-round negative economic impact." (Reporting by Jane Baird, editing by Will Waterman)