There has been a lot said recently about how the delay in the much-anticipated UK government support scheme for the credit insurance industry is affecting businesses of all sizes. Issues around getting it validated by the European Commission have meant that credit insurance companies have been unable to start restoring pre-Covid 19 levels of cover. It would seem they have actually continued to reduce their exposure. As the insurance companies cut cover back, so their policy holders have to reconsider whether they continue to offer credit terms to their customers. And so on down the supply chain.
We are already seeing how damaging this can be to small businesses. As suppliers cut back their credit terms and insist on payment up front, small businesses are finding it more and more difficult to bring goods in and fulfil contracts they have secured or could tender for. Without the support of credit insurance to give manufacturers and wholesalers the confidence to keep credit lines open, the entire supply chain starts to grind to a halt if credit lines are withdrawn.
Products like Trade Finance can help to alleviate these issues though. By using a finance company, small businesses like yours can pay their suppliers up front without using up their own capital reserves. Companies can also avoid taking on long-term debt with these facilities as they are repaid by the sales generated by the goods bought. These facilities are self-clearing and don’t sit for long periods on the balance sheet. Too often in the past companies have taken on multiple loans in order to pay for goods, without having the discipline, or the option, to repay the loans once the goods have been sold.
The damaging effect of the lack of supplier confidence is being compounded further by the fact that many major businesses are stretching their payment terms out further. We have already seen several examples of major retailers asking suppliers to move from 60 days to up to 120 days credit terms. Ignoring the obvious moral implications of such a move, we can also see how damaging this is to small businesses. Smaller suppliers could now be faced with being asked to pay up front for goods, and then wait 120 days to be paid. If we assume a 30 – 60 day period for goods to be manufactured and shipped, then that leaves our small businesses with a massive 5 – 6 month cash flow gap. Not many businesses can sustain that.
Facilities such as factoring, selective invoice finance and revolving credit facilities can again help to smooth out the cash flow issues. By generating cash against the invoice now, cash flow can be smoothed over. Some facilities have no long-term tie in, and can be used until businesses return to their normal pre-covid state.
As we come out of lock down, what we are seeing is that many small businesses are facing problems they have never seen before. They are being starved of cash at the front end of the transaction by being asked to pay upfront and are then being asked to wait for extended periods to get paid for delivering their goods. I’ve written previously about how important cash flow forecasts are to businesses (of all sizes) at the moment (https://www.creativecapitaluk.com/cash-flow-will-be-imperative-as-we-exit-lockdown-and-start-to-rebuild/). What is starting to become clearer is that until supplier confidence returns and credit terms start to open up, and big businesses start paying small businesses in a fair and reasonable manner, then cash flow tools will be increasingly important.
Going back to our forecasts, we must be able to find the right products that will help to bridge the gaps and allow businesses to trade freely. Operating in a way which looks after only ourselves cannot be the new norm. Businesses need to find suppliers and customers who are willing to work with them, in a profitable way. Independent financiers who will enable cash to flow more freely can play a key role in supporting this relationship and ensuring small businesses can rebuild and even thrive in the future.
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