The £29 billion supply chain trap

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The squeeze on bank lending to business became a big issue a few years back as the recession took hold, leaving companies looking for new sources of supply chain finance.

Malory Davies FCILT, Editor.

Malory Davies FCILT, Editor.

Since then, of course, the pressure on lending has eased and the issue has moved to the back burner for many organisations.

So it was a surprise to find a new study suggesting that there is more than £29 billion of working capital currently “trapped” in the UK economy.

The figure comes from a YouGov poll commissioned by American International Group (AIG) and Prime Revenue. The survey of UK businesses that provide goods or services to large organisations found that 17 per cent of their revenue is currently tied up in invoices with non-standard payment terms – accounting for some £29bn.

Over three quarters of the companies said they have been asked to accept longer payment terms. Some 28 per cent said the issue has increased over the past year.

On average, businesses said that one in five of their customers insisted on terms longer than the norm. Not only that, one of five said they had lost business after denying customers longer payment terms.

Perhaps not surprisingly AIG and Prime Revenue see an opportunity for a new supply chain finance product targeting mid-market, non-investment grade companies. They said: “The solution provides funds that enable suppliers to take early payment less a small discount, while enabling buyers to standardise and potentially lengthen their payment terms.”

For large corporates there is always the risk that smaller suppliers can simply run out of cash, endangering their own supply chains. And the AIG/Prime Revenue poll highlights the impact on business operations, with respondents saying extended payments affect cash flow (55 per cent), require additional administration (33 per cent) and strain client relationships (29 per cent).

How much of that £29 billion that can actually be freed up is a moot point. But it must be a matter of concern that so many suppliers say that it is taking longer to get paid. Clearly, the need for efficient supply chain finance is growing.

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