Cash & Liquidity ManagementInvestment & FundingEconomyCold comfort for SMEs amidst Carillion bankruptcy

Cold comfort for SMEs amidst Carillion bankruptcy

Global economic indicators are set fair, but smaller businesses are still losing out as the scourge of late payments persists – as revealed in the fallout from the demise of UK construction services group Carillion.

Global economic indicators are set fair, but smaller businesses are still losing out as the scourge of late payments persists – as revealed in the fallout from the demise of UK construction services group Carillion.

It has been more than a decade since a year has begun with such a positive outlook for economic growth across the globe. The prospects for 2018 are good, with all of the major economies enjoying some degree of expansion and Goldman Sachs predicted an increase of as much as 4% in global gross domestic product (GDP).

The pre-Christmas announcement that President Trump’s promise of major tax cuts for American corporates should lend further impetus to an already-strong US economy. The benefits should extend more widely, with sectors such as Europe’s motor industry expected to receive a boost.

All these encouraging indications should bode well for small to medium enterprises as well as bigger corporates. However, the UK’s SMEs got a blast of harsh realism only two weeks into the new year with the collapse of civil engineering giant Carillion.

Reports on the group’s demise focused on its massive debt load, the fate of its workforce and what will now happen to the pension scheme. Yet the damage extends much further, with Carillion’s many sub-contractors also financially impacted.

At least 30,000 smaller firms employed by the group for its construction and civil engineering projects already had to live with payments delays of 120 days even before the group went under. These subcontractors now face the prospect of prolonged court battles to get their money, with the likelihood that some will be pushed into bankruptcy.

A task force has been set up the UK government in the immediate aftermath of Carillion’s receivership and emergency funding totalling at least £225m offered by major UK banks including Lloyds, HSBC and RBS to those SMEs affected by the group’s insolvency. The money is likely to be supplemented by increased overdrafts, reduced loan repayments and other help for firms reporting resulting cash flow problems.

Despite the pledges, several of the group’s subcontractors have already begun laying off staff. The Federation of Small Businesses (FSB) has described this assistance as “a sticking plaster”. FSB chairman Mike Berry commented: “We all need to understand that it is very unlikely – as in any administration or liquidation – that those who have already invoiced Carillion (before the January 15 announcement of its demise) are going to get anything out of this at all.”

According to reports, accountants estimate that SMEs can expect to receive less than a penny on every pound owed to them by Carillion. Professor Rudi Klein, chief of the Specialist Engineering Contractors (SEC) Group, the trade body representing UK specialist contractors, believes that a total of around £1.2bn is owed to its specialist contractors.

UK financial daily City AM provided an example of one of the many SMEs affected by Carillion’s demise; the Birmingham-based building and refurbishment business Drewmark. The firm, which has 65 employees, told the paper that it is owed £200,000 for work commissioned by Carillion which, it unpaid, will see it report a loss of £80,000 for 2017. Drewmark added that in the second half of last year it conceded a £10,000 discount to ensure that an invoice for £55,000 was paid by the group on time.

A proactive response

The Carillion saga reinforces the findings of C2FO’s latest Working Capital Outlook Survey, which will issue its third edition shortly. It may provide a measure of cold comfort to UK SMEs to read that payment delays to small businesses are also prevalent in six other countries participating in the survey: China, France, Germany, India, Italy and the US.

Although the general economic backdrop has brightened considerably per the C2FO 2017 Working Capital Outlook Survey, SMEs in Germany, the UK and the US told C2FO that payment delays have actually increased in the interim. However, their peers in China and Italy reported that they had to wait even longer.

This deterioration has occurred despite initiatives such as the UK’s Prompt Payment Code and Europe-wide moves to implement regulations that encourage large corporations to report publicly on how promptly they pay their SME suppliers.

During 2016-17, SMEs participating in the survey also reported an increase in the number of customers actually imposing longer payment terms. In both the US and the UK, the number of clients imposing less favourable payment terms on their suppliers doubled over the period.

“Compared to large enterprises, SMEs suffer from a credit availability and cost gap that inhibits growth,” the survey concludes. “While the global economy has recovered from the financial crisis, interest rate spreads continue to lag behind their pre-financial crisis levels.”

It seems that SMEs have somewhat been at the bottom of the pile when it comes to payment terms and being paid on time. The challenge has historically been the lack of leverage that a smaller supplier has with their larger customer. This is now changing thanks to technology that enables a more powerful benefit through a network effect, something we’ve seen across all sectors.

Early payment solutions are a good example of this. Suppliers offer an affordable discount in return for being paid much earlier than the agreed contractual terms dictate. When applied to a large corporate’s complete supply chain, which could conceivably consist of tens of thousands of suppliers, this makes a very attractive proposition for all parties: cheaper financing for suppliers and reduced costs for corporates. This is an evolution that has started moving beyond the established supplier financing tools such as reverse factoring which have struggled to be an effective solution for high volumes of supplier demand.

Both small businesses and mid-sized global enterprises agree that their need for liquidity is increasing and they are taking advantage of such diversifying funding options that enable them to access working capital outside of traditional cash flow sources. It is in this movement that SMEs are able to offer a benefit to their customers as well as themselves that is enabling the larger corporates to focus on improving their payment processes and redress the current imbalance.

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