How Small Firms Can Avoid A Cash Flow Crisis?
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...cash flow of suppliers.
Indeed, some enlightened organisations such as Tesco, B&Q and Marks and Spencer have introduced supply chain finance that not only ensures suppliers get paid quicker but also enables these suppliers to borrow at a lower rate of interest.
The key to this model is the visibility of supply chain finance, enabling banks to make decisions based on real time information, including order commitments, delivery notes and invoices received. This is a more dynamic environment than traditional balance sheet based lending, which relies on historic accounting information, instead of the more innovative SCF which...
...is based on current business activities, such as buying and selling goods.
Basing the credit decision on real time information, verified orders and approved invoices from strong, trusted businesses results in significantly lower risk to the banks — an improved risk scenario whose benefit can then be passed onto the SME in the form of lower interest rates.
For the large buying organisations, this model also has strong appeal. Not only does it improve the financial viability of a tightly integrated supply chain, minimising the risk of supplier failure which can have a devastating impact on multiple businesses, but it also provides an opportunity to negotiate different payment terms, trading improvements in supplier cash flow for product discounts, for example.
With the economic outlook for 2012 appearing no less challenging than 2011, it is becoming essential to address the cash flow challenges that are undermining the success of SMEs and, hence, the prospects for UK recovery and growth. Yet the banks remain reluctant to incur the risk associated with SME loans; while SMEs are facing increasingly unfavourable payment terms.
Relying on paper-based invoicing processes leaves SMEs with little room to manoeuvre — the only real bargaining option is to offer... continued on page four >