Brexit and COVID-19 have joined together to create the biggest supply chain crisis in nearly 40 years. Many businesses will need financing options to make it out the other side.
Even the direst predictions of Brexit never considered the impact of a pandemic. With COVID-19 and Brexit combining in an unholy alliance, Britain is facing a growing supply chain. Already retail stock at its lowest levels since the 80s and things could get worse before they get better.
Greggs, Nando’s, and now Halfords are just some of the big names who have suffered. The latter has blamed ‘considerable disruption’ on its 26% dive in bike sales during the pandemic. Among the problems cited by the retailer are a lack of HGV drivers, disruption to freight transport, and the rising costs of raw materials.
Perfect storm
It all adds up to a perfect storm for British businesses – one which, according to the BCC, threatens to derail the recovery. As usual, it will be SMEs who feel the brunt.
The pandemic comes on top of a difficult decade for SMEs. Traditional sources of capital have dried up as banks shy away from supposedly riskier, smaller businesses. Where they have extended capital, it often comes with punitive payment terms.
At the same time, large companies have expanded their payment terms with suppliers who in turn have done the same with those. The ripple effect stops with SMEs who find themselves waiting longer for payments but without the leverage to force the same terms onto their own suppliers.
Meanwhile, in an attempt to improve running costs, businesses have been minimizing their inventory and turning to just-in-time delivery methods. While this has saved costs in many places, it has made businesses particularly vulnerable to a supply chain crisis such as the one we’re seeing now.
The inevitable result of this would seem to be those healthy businesses risk going to the wall due to the interruption to their supply chains without help.
Weathering the storm
There are things which can be done. The government has introduced support schemes for small businesses during the pandemic and may do so again.
As a business, you can also help yourself by leveraging improved data management capacities to improve operations, reduce overheads, and minimize costs. Better data analytics can provide an accurate real-time view of finances, helping businesses keep the numbers in order.
Understanding what is coming in and what is going out and having accurate projections, can help businesses plan for, and avoid cash flow shortages.
Inevitably, though, it may well come down to cash. With supply chains causing temporary disruption, businesses will need to find alternative sources of financing in order to make it out the other side.
Innovative financing
In the search for capital, many businesses are turning towards supply chain financing. This enables businesses to get paid earlier and hedges against supply chain disruption.
It can be divided into two distinct models:
- Reverse factoring: This option is usually set up by the buyers who make an arrangement with a financial institution to buy the goods. They will then pay the supplier immediately based on the credit worthiness of the buying company. This is often used by larger firms which can access favourable terms. They will work with a bank and invite suppliers to join the program. Previously, this might have been just a few of their top suppliers, but with the rise of digital technology it’s become possible to open it up to hundreds at a time.
- Dynamic discounting: Reverse factoring is reliant on the buyer being enlightened enough to understand the need to support their suppliers. Some may not be so enlightened, others may not have the financial resources. Dynamic discounting, therefore, is funded by the supplier who invites buyers to get involved. Using a technology platform, the buyer and supplier negotiate different payment discounts. The supplier then transfers the goods to the buyer who will then release the cash immediately.
Both these options come with risks. On the one hand, they may involve significant extensions to payment terms beyond the industry average. In effect, buyers could be extending terms from 90 days to 365. This can create confusion among regulators about whether the intention of the process is to free up working capital or to hide debt.
For all these challenges, at a time when many businesses will be feeling the pinch and when supply chains are more uncertain than ever, this could be a crucial lifeline to help businesses through the crisis. It’s worth seeking out advice from independent experts about the available financing options and which one would be best for your business.
Get in touch with the team at Funding Bay to find out the best financing option for your business!
