Small businesses exposed to supplier or customer failure

Ross McFarlane, Commercial Director Invoice Finance, Aldermore Bank

Businesses are operating in unpredictable times, with continuing uncertainty about the outcome of Brexit and an economic outlook that is hard to call. Official figures show that corporate insolvencies continued to edge up during the third quarter of 2019 – rising for the third successive quarter - with sectors such as retail and construction bearing the brunt.

The right combination of factors in the year ahead could unlock pent-up business growth and productivity. Nevertheless, few could predict with confidence exactly how things will go in 2020.

It is always good practice for businesses to protect themselves from adverse outcomes particularly when trading conditions are uncertain.

However, new research from Aldermore shows that many small businesses are failing to take any precautions against a potential downturn in fortunes in their supply chains and customer base. Our survey of over 1,000 senior decision makers in SMEs* revealed that half (49%) have no contingency plan in place in the event that a major supplier or customer fails.

This is despite the recognition that were such a failure to happen, it could have a severe impact on their business. Over one in ten (11%) respondents admitted that if either their biggest supplier or customer failed, their own business would fail too.

In the event of supplier failure, over a fifth (21%) of SME executives said they would need to delay the delivery of services or products to their customers and that profits would suffer ‘significantly’.

The collapse of a major customer would be even more serious: over a quarter (27%) said profits would suffer significantly, a fifth said they would need to delay plans for growth and 12% said they would need to make staff redundant. More than one in four (27%) said their business would ‘struggle but survive’.

The fact is that only a minority (38%) of SMEs in our survey have conducted a full supply chain audit to assess the health and robustness of the suppliers on whom they rely. Meanwhile, only just over a fifth of small businesses are aware of the recent financial health of either their suppliers (22%) or customers (23%).

This increases the risk of a business being caught by surprise with little time to prepare for the challenges they would face should an important supplier or customer fail.

Ultimately, it is good business practice to keep abreast of the financial performance of your key suppliers. Check their latest financial statements and results announcements; if you have access to a credit report service, look at their credit score and any credit information. You may also want to research the market to compile a list of alternative suppliers so that you are in a position to move quickly should warning signs begin to emerge.

On the customer side, imagine for a moment that your biggest customer went out of business tomorrow. The orders could stop instantly. The payments would then stop too.  You would almost certainly lose money on unpaid invoices. But your own bills and expenses would keep coming in and staff would still have to be paid, all of which would have serious implications for your business’s cash flow.

This is why it is important to protect yourself in the event a customer is unable to pay you what is owed. Aldermore and many other banks offer bad debt protection in conjunction with an invoice finance facility.

Bad debt protection can be a valuable option to include with invoice finance facilities, with many businesses finding it invaluable in protecting both their cash flow and future profitability. By using invoice finance, you can access funds against unpaid invoices immediately, providing flexible funding that can both ease the way during challenging times or maximise opportunities and help facilitate growth. Invoice finance remains something of an under-utilised resource: in separate research Aldermore conducted recently, 60% of SMEs had never used or applied for it.

None of us can read the future. But all of us can think about what risks we face and take steps to mitigate them. With half of small businesses having no contingency plan for supplier or customer failure, bad debt protection and invoice finance are two practical and flexible solutions more of them could be thinking about.

*Research conducted by Opinium Research between 21 October and 04 November 2019 with a nationally representative sample size of 1,051 senior decision makers in UK SMEs.

A BDP payment of protection is subject to an agreed BDP Limit being in place and subject to compliance with the Invoice Finance Agreement and, in particular, the Conditions applicable to Bad Debt Protection. Please note that whilst BDP provides protection on qualifying factored invoices against customer insolvency, or protracted default, it is not insurance or an insurance product.