Brexit stockpiling creating urgent need for flexible finance solutions
Chris Meldrum, Aldermore Bank
The prospect of Brexit has been with us for several years – but now it could be only weeks away.
Ever since the referendum in June 2016, businesses have been looking for clarity over what the future will mean for their operations on a whole range of issues such as pricing, import and export tariffs, exchange rates, the movement of goods, and the movement and hiring of people.
It’s been a challenging journey for many businesses, but the hope of most SMEs has always been that a deal will be reached with the EU that will bring certainty and an orderly transition.
However, if we leave without a deal, this could create significant issues for many businesses and give rise to an urgent need for financing solutions to support them. The industry – finance providers, brokers and advisors – need to ensure they are there for those businesses, helping them find effective and practical solutions.
One issue which has drawn particular media attention is stockpiling. Businesses that are reliant on raw materials or goods from the EU to carry on their trade have understandably become worried about speed, cost and availability issues in a no deal scenario. As a result, many have been forward buying to stock up in advance. There is also an element of hedging involved – locking in the transaction at current exchange rates in anticipation that the value of sterling could fall in the wake of a no deal Brexit.
We have seen examples of stockpiling across a broad range of sectors. For example, one food manufacturer has reported to have spent millions stockpiling ingredients from Portugal for its dough products.
Suppliers to local councils for the provision of meals in schools, care homes and prisons are heavily contracted in and could also face challenges in a no deal scenario. For instance, they may find it more difficult to obtain ingredients from Mediterranean countries. Media reports have already shown the concerns that local councils have over ensuring continuity of service.
The big supermarkets will also be putting their suppliers under pressure to guarantee the continued supply of goods. Those who cannot do so are likely to lose the business to rivals who can.
But it is not only food. Any sector that relies on importing from the EU could be affected – automotive, engineering and manufacturing, fashion and retail, pharmaceutical and more.
To an extent, we have been here before: some businesses stockpiled goods ahead of the previous March deadline for leaving the EU. However, at that time there was still a prevailing belief that we would not leave without a deal and this stockpiling was only a contingency. Now, however, the prospect looks real and a much greater number of businesses are stocking up. Even if a last minute deal does transpire, many businesses will have already laid out significant amounts of cash buying up stock.
The issue that stockpiling creates is a simple one of cash flow. Whether a large corporate or an SME, businesses face the need to lay out much larger than usual amounts of cash in advance to buy up
goods and materials that they will most likely not generate revenues from for weeks or months ahead. The goods simply sit in a warehouse (for which the business will likely incur further additional costs), absorbing cash and tying up working capital.
Take the scenario of a company with a £100,000 credit limit with a supplier that they are accustomed to fully utilising. If they want to buy twice the usual amount ahead of a no deal and stockpile it, they will need to agree an extra £100,000 credit with the supplier, or find that cash from somewhere else.
The current situation is making it increasingly important for businesses to ensure they have the appropriate sources of funding for their needs. At Aldermore, we have started to see a growing trend where clients have moved from asking us what facilities would theoretically be available, to now asking if these facilities can be implemented.
For many companies, invoice finance is an ideal method of funding because it quickly releases cash into the business, providing a much needed cash flow boost enabling clients to access up to 90% of their outstanding invoices, often as quickly as within 24 hours. Whereas an Asset Based Lending (ABL) facility can provide an even greater level of funding by releasing the cash value held up in existing assets such as receivables, stock, machinery and even property.
Our approach is always to really get to understand a business and build a relationship that enables us to tailor a facility to their business needs. We want to build up a picture of the balance sheet of that business and all of its assets so that we can create a working capital facility that they can draw down on and control in the way that best suits them.
For the broker or advisor, we always look to make it straightforward: our business development managers will offer the best facility to suit the client or customer.
Our invoice finance business has grown significantly over the last three years. We will always look to support viable businesses – helping SMEs achieve their aims and grow is our central guiding purpose.