Celine Hartmanshenn from Stenn International, analyses the challenges facing UK suppliers, what companies should be thinking about and how different financing arrangements can be a solution
Brexit, and its potential impact on international trade, continues to be top-of-mind for companies in the global supply chain. Despite continued uncertainty, many companies have started to take steps to protect their businesses. UK and EU buyers have already started to move operations outside of the UK, impose extended payment terms on suppliers and ask suppliers to keep extra inventory to prepare for a worst-case scenario.
For example, Nestle and Mondelez International have been stockpiling foods; Merck and Novartis are stockpiling medicines; retailers Clark and Muji have moved distribution centres to other countries; and Jaguar and Nissan have put auto production expansions on hold.
These steps may help mitigate the risks for big buyers, but they place a significant burden on smaller UK suppliers. Notably, suppliers are already operating in a challenging environment, particularly in the retail industry. Existing headwinds facing suppliers include growing pressure from e-commerce, continued dependency on imported supply from outside the UK, and ongoing negotiation pressure from bigger and more powerful buyers. In fact, 50,000 UK SMEs go out of business each year in part due to late payments.
Add to that backdrop the extra pressure from Brexit, and the conditions facing suppliers become even more dire.
The Risks of Brexit
Higher Costs; Lower Spending: In the case of a no-deal or “hard” Brexit, where regulation and tariff terms will need to be reconfigured, consumers can expect at least a temporary rise in prices due to import duties. As prices go up, consumer purchasing will inevitably go down. Fearing this outcome, buyers may demand extended payment terms from suppliers. Why? Because they don’t want to have to pay for goods that haven’t been sold yet.
Currency Fluctuation. A drop in the value of the pound is another risk that is making companies nervous. Some analysts have predicted that the pound could drop by 10% in the event of a no-deal Brexit. In general, fluctuations in the pound have made the supply chain as a whole more expensive. According to a survey by the Chartered Institute of Procurement & Supply, 70% of manufacturers are already struggling with the currency instabilities and subsequent impact on prices.
A Combination: Perhaps the biggest threat posed by Brexit is created by a confluence of all these factors. Increased prices, lower consumer spending, added tariffs and regulations and currency fluctuations will all come together to create new pressures on both supplier and buyer. Buyers may cut down on their orders to prepare for lower demand, or place larger, one-off orders to hedge against disruption. Either way, this fluctuation runs the risk of creating broader instability and disruption in the supply chain.
The Impact on Small Suppliers
To prepare for risks such as higher prices, lower spending, etc., buyers have taken precautions to protect their business. But as buyers prepare for these risks, suppliers are paying the price.
As noted above, some buyers are already moving operations outside of the UK. In fact, according to the CIPS survey, 63% of EU businesses expect to shift their supply chains outside of the UK. As buyers look elsewhere, UK suppliers run the risk of losing business and becoming less competitive in the global marketplace.
As discussed, many buyers are looking to impose extended payment terms on suppliers as part of their Brexit preparedness plans. Extensions in payment terms are advantageous for buyers, as they act as a source of cash flow. But the supplier pays the price: the amount of cash tied up in unpaid invoices increases, and the supplier, which typically already suffers from limited cash flows, risks no longer having the liquidity necessary to continue production.
During periods of risk and uncertainty, it is common for buyers to request that suppliers keep extra goods on hand in order to protect against possible hiccups in the supply chain (halts in production, delays at customs, etc.)
In fact, 41% of UK manufacturers are already making plans to stockpile goods and raw materials. Again, suppliers pay the price. Funds are useless when they are tied up in inventory. With less working capital and liquidity, suppliers are less able to operate at full capacity.
How Suppliers Can Protect Themselves
Suppliers are facing significant challenges as a result of Brexit – but they also have a unique opportunity to change the terms.
Importantly, now is the time to act. With the Brexit deadline looming, 30% of buyer-supplier contracts are being renegotiated. This negotiation period creates an opportunity for suppliers to put a game-changing arrangement on the table: accounts receivable financing.
Accounts receivable financing is already a common practice for domestic businesses. But non-bank providers specialising specifically in cross-border trade provide a key solution for suppliers who are working within the complex frameworks of the global supply chain.
Within the context of Brexit, these non-bank providers can be particularly valuable, because they address the exact problems currently facing both supplier and buyer.
In simple terms, accounts receivable financing closes the gap between buyers who demand extended payment terms and suppliers who need immediate payment. It gives both parties the cash flow they need to operate and run their businesses effectively.
And while this arrangement meets buyers’ needs, the benefits for suppliers are significant:
Accounts receivable financing can be provided on a non-recourse basis, paying suppliers up front at the point of shipment, so they don’t have to worry about the risk of non-payment.
It gives suppliers a competitive lift, particularly within the context of Brexit. Suppliers now have the resources to agree to suppliers’ extended payment terms (which, as discussed, are on the rise considering Brexit), and they can even offer these terms proactively to attract and win new customers who are eager for these types of arrangements.
It provides temporary liquidity and can be used as a much-needed additional source of funding that works alongside, but doesn’t impact, the separate financing that a supplier receives from banks.
The terms are advantageous for suppliers – the supplier receives up to 100% of the invoice amount. And it’s not a loan, so there is no impact on suppliers’ balance sheet.
It outsources collections and risk management, reducing the burden on companies, particularly small-scale businesses with limited resources.
Brexit creates a challenging environment for UK-based suppliers, and the ongoing uncertainty has only exacerbated the situation. The threat of business moving outside of the UK, extended payment terms, and the need to keep extra inventory on hand all put added pressure on both suppliers’ cash flow and their relationships with buyers. Accounts receivable financing is one solution to the predicament facing suppliers. Not only does it provide liquidity at a time when suppliers need it the most, but it also “closes the gap” between buyers’ demands and suppliers’ needs.