European Firms May Suffer During Upturn due to Lack of Working Capital
European financial directors are concerned about accessing sufficient levels of working capital in 2010, according to the latest research from London-based working capital solutions provider Demica. As a result, a majority (62%) believe they will be unable to make the most of economic recovery when it emerges.
European corporations are faced with a number of hurdles: the unsustainable demand to extend payment terms, the looming threat of supplier failure and the withdrawal and rise in the cost of credit insurance. The continued lack of availability and tightening of traditional lines of credit have shown no sign of easing, causing further supply chain woes. The new report, which surveyed over 1500 firms with over 50 employees in the UK, France and Germany, shows that 60% of UK, 58% of German and 71% of French firms are unable to sustain any further stretching of payment terms. Ultimately, 65% of UK, 59% of German and 62% of French firms believe that they will be left with insufficient working capital to take advantage of the economic upswing when it gains momentum.
Suppliers are finding that around half of their larger customers are still trying to extend payment periods. At the same time, 80% of UK, 78% of German and 83% of French firms are continuing to encounter difficulties in obtaining traditional bank credit. No immediate recovery appears to be in sight – with improvements not expected until December 2010. Supplier failure is confirmed to have increased in European supply chains over the last year by 48% of UK, 47% of German and 57% of French respondents and those ‘failure’ rates are not expected to start falling away until January 2011. The impact of the withdrawal of credit insurance was also made evident by 69% of UK and 67% of German and French respondents, blaming the increased price and lack of availability of credit insurance over 2009 and 2010 for introducing significant instability into many supply chains.
As a solution for this situation, alternative financing products are developing in a category known as supply chain finance (SCF), usually secured on outstanding invoice debt in the supply chain. This category is generating much enthusiasm amongst corporates as a means of substituting for lower credit availability. SCF structures not only allow large corporations to extend their credit terms with suppliers, but also to use the credit quality of receivables owed to allow their banking partner to finance their suppliers’ outstanding invoices at a favourable rate. SCF has recently generated a high level of interest among financial directors and bankers as a way of raising finance to free up working capital.
With corporate demand to improve cash flow and release working capital, SCF participation rates have gone from strength to strength. While a quarter of European firms have participated in a SCF solution for some years and 10% have joined in the last 12 months, UK firms are substantially ahead of the trend – with 34% having participated for some years and 11% in the last year.
Furthermore, it appears that these tools are having a lasting effect on European business, as 57% say supplier financing will remain of greater importance, even when full economic recovery gains momentum. This was especially evident in France (67%) and the UK (56%), demonstrating that alternative financing tools are starting to become ingrained into the financial manager’s mindset. SCF is therefore expected to play a much greater part in future strategies.
Phillip Kerle, chief executive officer (CEO), Demica, said: “Scarcity of traditional credit continues to be a headache for firms in the supply chain, especially for those who had previously been able to rely on low-cost, readily available liquidity – and on credit insurance. With unsustainable pressure on suppliers around the world, firms can no longer resort to the extension of payment periods without putting suppliers at risk. The fact that supplier failure continues to loom over many supply chain is critical, especially for those business structures with limited ability to swap suppliers because of the specialist products or components they provide.
“More firms in the UK, than in either France or Germany believe they will have insufficient working capital to take advantage of economic recovery. To make the most of an upturn they must remain vigilant in seeking suitable financing techniques to fuel opportunities as they arise. This is where supply chain finance is coming under the spotlight – as financial directors and bankers explore ways of raising finance to free up working capital using alternative techniques. Not only is SCF allowing them to substitute for part of the current squeeze on normal lines of credit, but to generate enough capital to prepare for better times ahead,” he added.