Analysis of the credit approval processes in business-to-business transactions

Abstract

PURPOSE: The study aims to (i) examine the key factors influencing credit decisions for SMEs and larger organisations in Malta, (ii) assess the role of FSs in trade credit evaluation for SMEs and larger organisations in Malta and (iii) analyse what are the potential alterations to the credit approval process due to the proposed amendment of the LPD. DESIGN: A qualitative approach was employed through semi-structured interviews with 18 participants, comprising 6 small, 5 medium, and 5 large businesses. These interviews aimed to gain insights into specific business processes. Additionally, two BABs were interviewed to provide a broader perspective on the Maltese market. FINDINGS: The findings show that small firms rely on trust-based methods, while medium and large firms use more structured credit assessments. Small firms opt for direct communication to preserve relationships, whereas larger firms handle payment delays with formal measures. Financial tools like factoring and credit insurance are known but seldom used due to cost and relational concerns. While the LPD amendment promises greater liquidity, doubts about enforcement persist, particularly in Malta's relationship-driven business environment. CONCLUSIONS: This study concludes that to improve resilience, small firms could integrate basic credit checks, medium firms could benefit from standardised policies, while large firms need stronger enforcement, especially with public sector clients. Financial tools like factoring and credit insurance remain underutilised due to cost concerns, suggesting the need for more adaptable solutions. The study also sees potential in the LPD amendments if uniformity is enforced but is cautions against rigid terms that could disrupt small firms. IMPLICATIONS: The study aims to clarify the credit approval process in B2B transactions, debt collection strategies across differing business sizes, the role of FS, and potential changes in light of the proposed LPD amendment. The recommendations presented are intended to support businesses of all sizes by highlighting effective credit management practices and assist regulators in setting practical expectations when introducing regulatory changes, particularly concerning the LPD.