United Kingdom

Supply chain financing unlocks working capital

In January 2018, construction giant Carillion finally ran out of cash and collapsed into compulsory liquidation. It was the UK’s second high profile business collapse in a three month period after groceries wholesaler Palmer & Harvey also went out of business in November 2017 with debts of more than £700m. The failure of both businesses brought into stark relief the problems organisations face when they run into liquidity and capital availability problems – identified as one of the top ranking risk issues for business in Aon’s 2017 Global Risk Management Survey.

With traditional forms of business funding – bank lending for example – still proving hard to come by in a challenging economic environment, many businesses are turning to supply chain finance as an alternative way to boost their working capital. It’s an innovative way to help manage liquidity risk says Deborah Peters – Head of Business development, Aon UK: “Supply chain finance is an additional tool that businesses can use to help alleviate the problem with one of the main benefits being it is an unsecured line of credit and doesn’t impact on the business’s existing finance arrangements.”

More time to pay

Supply chain finance allows businesses to pay its suppliers via an approved bank while the business itself can benefit from extended credit terms. Effectively it means the business gets more time to pay and can optimise its working capital without any negative impact on its suppliers. It’s a solution that has provided Matrix Polymers – a leading supplier of raw materials to the rotomoulding industry – with more options when it comes to managing its working capital facilities. “Supply chain finance is a flexible way of increasing working capital facilities while fitting around existing borrowing facilities that a business has in place – there is also no additional security required to provide that working capital because it is insurance backed,” says Simon Wallington – COO and FD at Matrix Polymers.

It’s been particularly valuable for a business like Matrix Polymers that has seen rapid growth from annual turnover of £30 million to £80 million globally. “The facility has helped us grow our business. In a very difficult business environment it is not always easy to get suppliers to increase their credit limits. So we have had to look elsewhere in the market at different products to allow us to buy more materials to support the sales requirements we have as a growing business and that is where the supply finance facility fits in well. If anything we would like to increase the facility we have to allow us to grow further globally,” says Wallington. “It opens up a lot of opportunity for businesses of a certain size where they have a working capital need to support ongoing growth.”

There’s also a geographic benefit adds Wallington: “As a global business, we’re not confined to where we can use that additional working capital. It’s not just Europe; we can put it out to our global subsidiaries as and when we need to. With some traditional bank lending facilities, there is a lot more structure around them – they might just be lent for a specific operating entity – which doesn’t allow the same sort of flexibility that a supplier finance facility allows.”

Dip in and dip out

Additionally, says Wallington, supply chain finance can be used at a business’s discretion. If a business was entering a peak trading season for example and needed to buy more to meet increased product demand it can dip in and dip out of the facility and decide when it wants to use it. It is a straightforward facility to set up and there is also a positive to be gained with supplier relationships adds Aon’s Peters: “It can be brand enhancing too because suppliers can be paid early. The issue of late payment is taken away.”

Given the high profile corporate failures seen recently and their exposures, credit insurers will – along with the banks – be likely to tighten their credit lines. If that happens, supply chain finance will really help says Peters. “It’s about getting the blend of finance right and the fact that this doesn’t impact any other lines is a major benefit. Credit insurers will be looking at liquidity and where they are struggling to increase credit limits, supply chain finance is a good product to help the business move forward.”