Supply chain finance during a crisis

HM Treasury has reportedly axed plans to support SMEs with a scheme to promote faster payment of invoices. But in the current crisis, faster payment may be a more sustainable option for SMEs than taking on debt.

On 1st July, Sky News reported that HM Treasury had abandoned plans to extend its coronavirus funding scheme with an emergency supply chain finance scheme for small businesses.

Announced in March, the Covid Corporate Financing Facility (CCFF) was set up to help larger organisations overcome cash flow challenges caused by the Covid-19 crisis. The scheme aims to help companies that are investment grade rated or equivalent and that make a material contribution to the UK economy, through the purchase of commercial paper. 

In May it was reported that the Treasury and Bank of England were considering a further emergency funding scheme which would provide support for SMEs by promoting the faster payment of SMEs’ invoices. However, it seems that the initiative has now been abandoned because it “would not be likely to bring sufficient benefits to UK businesses, particularly SMEs.” 

Obstacles to the proposed scheme

The Sky News article specifies a couple of reasons why the initiative has been abandoned. For one thing, respondents cited difficulties in identifying British SME suppliers. And another possible obstacle was that the initiative would have involved asking large companies to sign the Prompt Payment Code – a requirement which might “act as a deterrent”.

Launched in 2008, the Prompt Payment Code commits signatories to pay 95% of their invoices within 60 days, while working towards 30 days. Signatories that fall short of their commitments are removed, but can be reinstated once they have improved their payment performance. The Code currently has over 2,500 signatories. 

Instead of the proposed supply chain finance scheme, Sky News reports, the focus will be on prioritising existing loan schemes, such as the Coronavirus Business Interruption Loan Scheme (CBILS), Coronavirus Large Business Interruption Loan Scheme (CLBILS) and Bounce Back Loan Scheme (BBLS). Companies can borrow between £2,000 and £50,000 with a Bounce Back Loan, while CBILS provides loans of between £50,000 and £5 million. In both cases, loans are interest free for the first 12 months.

However, these schemes are not without their challenges. For one thing, only around half of the loan applications made under CBILS have been successful. And with trading conditions expected to be difficult for some time to come, questions remain about whether SMEs which take loans out via these schemes may struggle to repay them in the future, with the additional debt burden potentially hindering companies’ ability to recover. Indeed, a poll by the Institute of Directors (IoD) found that over half of small businesses expect debt incurred during the crisis will impede their recovery and hold back investment plans.

Impact for small suppliers

Every little helps when it comes to support for smaller suppliers, so the now-axed supply chain finance may be something of a missed opportunity to help companies navigate these difficult conditions. In particular, a focus on expediting payment, rather than incurring debt that will need to be repaid at a later date, is certainly helpful for suppliers struggling with cash flow pressures.

Even in normal trading conditions, speeding up customer payments can bring major benefits for suppliers: Taulia’s 2020 Supplier Survey, which was carried out in November 2019, found that 56% of small businesses want to be paid early at least some of the time. Their reasons for seeking early payment included the need to overcome cash flow gaps, increase the predictability of payments and generate working capital. However, the survey also found that on average 37.5% of businesses are paid late.

In the wake of the Covid-19 crisis, the cash flow challenges faced by suppliers are even more significant, with some sectors significantly hampered by lockdown restrictions. What’s more, the problem of late payments has escalated during the crisis: in June, the Federation of Small Businesses (FSB) reported that 62% of small businesses have experienced late or frozen payments during the pandemic, even though only 10% had agreed changes to payment terms with clients. As FSB National Chairman Mike Cherry said, “Cash is still very much king for small firms, and withholding it has pushed many to the brink at a time when they’re at their most vulnerable.”

Supporting suppliers through the crisis

Of course, challenges faced by small suppliers can have a knock-on effect for their customers too. And many companies are taking note by acting to speed up payments for their suppliers. As the UK Government’s Small Business Commissioner Philip King explained during a recent Working Capital Forum webinar, while some firms have withheld payment, others have taken positive action to support suppliers during the crisis, which shows through the increased volume of early payments taken through Taulia.

Indeed, for companies seeking to support suppliers with early payments, solutions like supply chain finance have much to offer. With supply chain finance, a third-party funder pays supplier invoices early in exchange for a small fee, while the customer pays in full at the agreed due date. As I mentioned during the webinar, for many companies the crisis has acted as a catalyst to set up a supply chain finance program which will help businesses weather any future crises.

While the Covid-19 crisis is far from over – even countries which have successfully brought down infection levels are alert to the risk of a second wave – it’s not too early for companies to consider how they can support their suppliers more effectively, both during calmer times and during any future crisis. While the Treasury’s proposed scheme may have been axed, it’s clear that solutions like supply chain finance have much to offer both suppliers and buyers – and there’s no wrong time to focus on improving supply chain health.