TRADE CREDIT, LATE PAYMENT AND SMEs
However, another key issue that may be worth examining in terms of improving access to finance is the current situation regarding trade credit to Welsh businesses.
It is estimated that more than 80 per cent of all business-to-business sales are made on credit, allowing SMEs to ask suppliers for twice as much short-term credit as they obtain from banks.
In fact, SMEs in the UK typically owe their suppliers an amount equal to a fifth of their total assets and the role that large companies can play in supporting smaller suppliers was one of the key recommendations of a recent review undertaken for the UK Government on non-bank lending.
And given the close relationship between large and small firms within the supply chain, it may be possible for those large businesses sitting on mountains of cash to extend credit to their suppliers. They can also, through their procurement processes, make contracts more accessible to small businesses. This would generate business and cash flow for them thus reducing reliance on bank lending. However, trade credit can also work negatively for SMEs in the form of late payment, or payment outside of agreed credit terms, which is seen as one of the biggest problems faced by the SME sector in the UK.
According to the Forum of Private Business, over one million SMEs in the UK face late payment difficulties, equivalent to 20 per cent of the business population. This equates to around 40,000 SMEs in Wales. In addition, the amount tied up in late payment across the UK has risen to nearly £37 billion or, extrapolated to Wales, would mean that £1.5 billion is currently owed to Welsh SMEs. Incredibly, this is the equivalent to a third of the total loan book of the banks i.e. the total number of loans that SMEs owe to the banks in Wales.
As many firms know all too well, a business can often get into serious financial difficulties if their customers refuse to pay them on time. It is not only the amount of money owed but also the amount of time taken by the owner of the business in chasing payments. Some of which may never be paid. This can put pressure on the creditor’s relationship with their own bankers and very few banks are prepared to extend a loan or an overdraft to account for the money owed to a small business by one of their larger customers,
Therefore with the lack of availability of trade credit being an issue that leads to many smaller businesses seeking short term funding for working capital from banks (and often failing to get this), this is an issue in which the Welsh Government can, surprisingly, have a direct impact.
To begin with, it could explore how it can use its power as the biggest purchaser in Wales to encourage its own suppliers to adopt supply chain finance or similar schemes to support their suppliers. In addition, it could set an example by ensuring that all contractors operating within the public sector in Wales have to pay their suppliers within a maximum 30-day period.
With over £4.3 billion being procured via the public sector, this could have a major effect on the cashflow of a significant number of smaller businesses and, more relevantly, get cash flowing to those smaller businesses that need it the most. More importantly, it could set a precedent that large firms in the private sector would be shamed into following.