The Prompt Payment Code, the Bank Referral Scheme and the Small Business Commissioner are all fantastic initiatives that are in place to support SMEs. However, is there a risk that businesses are actually missing out because of pressure on the larger buyers to pay sooner?
Similar to smaller entities, large businesses often use payment terms to manage liquidity.
- You are a large manufacturer of bicycles (in recognition for everyone’s new year’s resolution and plan to burn the festive calories). You source the frames from a new SME supplier and agree to pay them on 30-day terms.
- It takes 30 days to complete the manufacturing process, at the end of which you have a beautiful bunch of new bikes ready for commercial sale.
- The bikes are in your stock for a further 30-days before a retail customer agrees to buy the lot from you at a target price that delivers you a margin too.
- GREAT NEWS!
- However, as part of the deal you accept terms from your customer of 30 days, which would afford them time to sell the bikes and have the cash available to pay you.
This means that it takes 90 days
from the date that you receive the frames of the bikes before you get paid. Yet you must pay your suppliers on day 30.
What if you had no access to additional cash on day 30? As a larger business there is a decent chance (albeit not always) that funding may be available, whether a traditional loan or overdraft or through some form of stock, asset or invoice finance. However, this potential cash availability could otherwise have been used to fund further investment in the business.
In actual fact, a recent working capital study by PWC (Navigating uncertainty: PwC’s annual global Working Capital Study) suggested that businesses are actually cutting investment to manage cash flows. But surely cutting investment has a negative
impact on innovation and potential growth opportunities, which in turn makes businesses in this market less competitive? Plus, they aren’t spending as much with as many businesses, many of which will be innovative and creative SMEs. That just doesn’t seem to stack up!
In reality, businesses should look to align their cash inflow to the point of benefit. In the example above the supplier of the bike frames would probably have liked their payments within 30 days to support the short term running costs of the business. The buyer would like to extend its terms to 90 days to align to the time it takes to get paid from the retailer, who in turn would be paid in cash by consumers after some time on the shelves, allowing them to pay the manufacturer.
None of this seems unreasonable, but without some wider intervention someone, or perhaps everyone, runs the risk of missing out.
We know that smaller businesses struggle with accessing cash from traditional financiers. Funding is generally either not available, complicated to obtain, costly, or requires security (including personnel that can be frightening for the smaller business).
Supply Chain Finance is a great solution, but generally supports just the top 20% or so of suppliers. However, this doesn’t need to be the case. If financiers, software providers and buyers were to work together there is no reason that simple pre-approved funding could not be proactively issued to suppliers accelerating payments on 90 days to 30 days or earlier.
The buyers could then align their terms to their point of benefit too.
Read more about Proactis' early payment solution.