One of the biggest problems highlighted by the recession has been funding the supply chain. And smaller companies in particular can still struggle to finance stock in the supply chain and manage cash flow.
So much so that British prime minister David Cameron is now promoting a supply chain finance initiative designed to deliver up to £20 billion in cheaper finance to suppliers.
Under the scheme a bank is notified by a large company that an invoice has been approved for payment; the bank is then able to offer a 100 per cent immediate advance to the supplier at lower interest rates, knowing the invoice will be paid. This compares to an advance rate of about 80 per cent from traditional factoring or invoice discounting schemes.
Cameron said: “This scheme will not only help them [smaller companies] secure finance and support cash flow, but will help secure supply chains for some of our biggest companies and protect thousands of jobs. It can be a win-win, with large companies and small suppliers both benefiting from this innovative scheme.”
The first initiative under the scheme will be focused on pharmacies and will unlock and estimated £800m of low-cost credit for some 4,500 pharmacy businesses.
The plan has already got the backing of the Federation of Small Businesses. Chairman John Walker said: “Nearly three quarters of small businesses report that they have been paid late in the past year, placing a huge strain on cash-flow and meaning they struggle to realise ambitions to grow… We encourage large companies to support and implement the scheme, so that it can play its part in improving confidence and encouraging growth throughout the supply chain.”
Of course, Cameron is not stumping up the £20bn cash from government coffers, so it is an easy commitment to make. And many large companies already operate supply chain finance schemes.
But if this initiative does result in greater liquidity in the supply chain – well that’s got to be a good thing.