To understand how Brexit can have such disastrous consequences for small suppliers, we need to first understand why large businesses push their suppliers into long payment terms in the first place.
Over the past few decades, the view has formed amongst market analysts and consultants that extending payment terms effectively operates as a free source of cash flow.
The argument is that, by pushing off payment as far into the future as possible, the business increases its available cash in the present. Because only 21% of suppliers actually impose the interest for overdue invoices which they are entitled to, slow and late payment looks cost-free for buyers.
In reality, however, the costs are simply hidden, rather than avoided.
There is no such thing as free money. If the buyer is making savings by pushing off payment, the costs have to be paid somewhere in the supply chain. This usually means that the supplier is taking out credit in order to cover its own cash flow while waiting for payment. As with any other cost of production, these financing costs are built into the final price which the supplier charges its buyer.
When the buyer pays the supplier, it is paying for the goods plus the supplier’s cost of credit. Bearing in mind that a small supplier’s cost of credit is likely to be significantly higher than that of a large buyer, we see how illogical the transaction is. If the buyer wanted cash, it could have borrowed from its own bank at a low rate. Instead, it forced its supplier to take out credit at a much higher rate and charge it back. In the end, all the buyer has achieved is swapping its own cheap credit for its supplier’s expensive credit.
Despite this obvious inefficiency, it is still common practice. Indeed, one of the first places a buyer will turn in times of strain is to extend its supplier payment terms.
This brings us on to Brexit.
Businesses are worried that Brexit will bring reduced consumer confidence; additional costs to trade and supply chain disruption.
This environment would put a significant strain on businesses’ cash flow. Not only that, but in response to the risks to the supply chain, many suppliers are being asked to stockpile goods to weather any potential immediate shock from a ‘hard Brexit’ or ‘no deal’ outcome. This means that many businesses have already, even before the UK has left the EU, tied up significant working capital in goods sitting in warehouses.
The overall impact of these Brexit preparations and the worries about the potential impact on the economy is that many large buyers across the economy are preparing for Brexit to put a serious strain on their cash flow. That means that many will be looking once again to push their payment terms further and spread the costs through the supply chain.
The effect of this could be devastating.
Currently, late payment contributes to 50,000 SMEs going out of business each year. The impacts of slow payment are so considerable that the Government has created a new Small Business Commissioner, with the primary objective of tackling the issue, and it is currently consulting on further action.
Not only would Brexit exacerbate the current slow-payment problems, but it would do it in a concentrated way right across the economy in a very short space of time. While a supplier may be able to adjust to one of its buyers extending their terms, all its buyers looking to extend terms or pay late at the same time, because of Brexit, will likely be too much for many suppliers.
Such a scenario puts at risk the hundreds of thousands of jobs and businesses.
As Brexit draws closer, buyers which find themselves in need of extra cash should look for alternatives to squeezing their suppliers. Pushing long payment terms is counterproductive and could spell disaster for UK SMEs and the economy at large. Brexit is going to bring with it many challenges, but the impact on the nation’s small suppliers must not be neglected, or we will all be worse for it.