Bad debt becomes biggest supplier concern

Despite the government and the Bank of England shoring up Britain’s banks and pumping billions of pounds worth of liquidity into the system, the banks themselves are refusing to lend except to the most solid customers. 

Even those businesses are finding that loans and overdrafts that were previously charged at between 6% and 7% are being ratcheted up to penal double-digit rates on renewal. This is putting extreme pressure on cash flow, especially for small and medium-sized businesses such as most wine and spirit importers and wholesalers.

What worries them most is the mounting level of bad debt among their customers. “The restaurants are struggling, hotel occupancy is well down and we have many high street outlets who are ordering but to whom we will not release stock until previous invoices have been paid, “ said one. His comments are echoed by most importer/wholesalers. They say they have become unofficial bankers to their customers, effectively granting them interest-free loans, while others are on “payment plans”. 30-day terms are long forgotten.

As the credit crunch hits the high street and the jobless total heads towards two million, what can suppliers do to protect their own cash flows as their retail customers attempt to live with shrinking takings? One suggested solution is to insure against customer bad debts. That sounds fine in principle, but in practice there are two major obstacles. First, the cost is prohibitive and second, the insurers will not offer cover against those most likely to default.

Factoring invoices (selling them to a third party) is no help either. True, the supplier is guaranteed payment but the charge can be up to 20% of the gross value, which means that most suppliers would be trading at a loss. And anyhow, most factoring is undertaken by arms of the banks that are deepening the crisis among small businesses by their reluctance to lend.

So apart from being extremely cautious about their customers, there is not much suppliers can do. Hilary Benn, the Food and Agriculture Minister, has called in the supermarkets and told them that the government expects them to pay suppliers more quickly to help liquidity during the downturn. None of them is under threat, of course. Their track record is of using suppliers as sources of interest free loans by paying late, only in part and then demanding a discount on the remainder. This “pay and deduct” system is more “take it or leave it”. The Competition Commission can offer no solution and nobody is betting that Mr Benn’s well-intentioned lecture will have much effect. His diktat has no legal basis. And which supplier would be the first to cry “foul” and suffer the inevitable wrath of potentially their biggest customers, knowing that doing so has no purpose?

db Finance on Friday 17.10.08