Flexible trade credit solutions

COVID, cashflow and business continuity – where to from here?

As the federal and state governments shift gears to restart the economy, experts are warning the road to recovery will be lengthy. The latest research from KMPG indicates that the industries most severely damaged during the COVID-19 shutdown – hospitality, accommodation, air transport and retail trade – will take two years to recover the losses inflicted by the pandemic. While other industries are set to recover more quickly, there are very few businesses that will come out of the current economic downturn unscathed.

This is reinforced by figures from recent NAB Monthly Business Surveys. While there has been a rebound since, business confidence in March was at the weakest level in the history of the survey and highlighted significant cashflow deterioration amongst SMEs.

NAB chief economist Alan Oster noted that while most people expect a quick recovery once social distancing measures are relaxed, the immediate worry for the business sector is the impact on cashflow.

“Without cashflow support, it is likely many businesses will be severely impacted and unable to return to operations once the economy begins to recover. This has been an important focus of policy makers,” he said.

Even during periods of normality, cashflow is the biggest concern for most business owners with research showing that 90 per cent of small businesses close their doors because of it. So, in the current environment it makes sense that cashflow concerns have only been exacerbated by slow sales, opening restrictions, extended trade terms and unpredictable payments.

Casualties of COVID

As the entire supply chain grapples with the impacts of COVID-19, and traditional sources of debt funding from lenders tighten, suppliers to SMEs may find themselves facing increased credit and payment risk in their small business trade receivables. Struggling with their own cashflow management, many will restrict their trade term offerings to small and medium businesses.

Conversely, where small businesses are supplying to larger businesses, there has been a re-emergence of the trend towards extended payment times. In the years following the GFC, payment times blew out to the point where some small businesses were being regularly required to wait up to 120 days for payment of a correctly rendered invoice.

This potential combination of extended customer terms and reduced supplier terms can put incredible stress on cashflow, and significantly hinders the ability of a small business to operate effectively and reinvest to grow. During periods of increased uncertainty and mass disruption, this impact is amplified, with a lack of viable cashflow hampering a quick rebound among the small business community and broader economy.

Trade credit accounts for around 40 per cent of debt funding in unlisted (typically smaller) businesses, making it one of, if not the largest, form of credit used by small and medium businesses in Australia and a key aspect of cashflow management. In times of economic crisis, it often replaces reduced bank lending for many businesses. When small businesses are provided extended trade terms from their suppliers, they will have more capital on hand and increased cashflow, helping them rebound faster from an economic hit.

While each business is in its own unique position, we all have a role to play where we can in getting the economy back up and moving again. Whether this is in the form of accessing JobKeeper to keep your doors open, providing relief to your SME customers (such as payment pauses) or retaining feasible trade terms to your suppliers, the flow-on effects are extremely powerful.

The road ahead is confronting, and for some businesses in difficult situations these options aren’t viable. For some, there is hesitance to strike up deals with new customers or suppliers. During a period where cashflow is exceptionally tight, businesses are having to assess whether they can take on more risk just to secure sales. Those suppliers that are continuing to offer trade credit or extending their terms to small businesses despite the cashflow and credit risks associated with it, are building incredibly loyal customers.

Whichever side of the fence your business sits on, these are tough decisions to make. And for many, these dilemmas would have seemed unrealistic at the beginning of this year. However, it is very much an unnerving reality – but one you do not need to manage alone.

Staying afloat and scaling up in the new world

As businesses map the way forward, with a focus on continuing operations in the short term, many are exploring credit options to bridge over this difficult period.

For some, it’s about creating breathing space to focus on keeping staff employed and operations running. For others, it’s about ensuring there is enough capital on hand to scale up, either to meet unprecedented demand during COVID or preparing for operations to ramp up again in the new financial year. In both cases, trade credit should be considered a vital ingredient to growth.

In conversations we are having every day with business owners, the power of flexibility within their trade terms is becoming increasingly apparent. To manage their trade credit risks and the intricate pressures of the supply chain, which are amplified during the uncertainty following COVID, an increasing number of SMEs and their suppliers are exploring new trade credit solutions, including buy-now pay-later (BNPL) style products for business.

As a supplier, offering BNPL allows you to offer your SME customers three to six months interest free on their purchases, while getting paid instantly. This enables you to build loyalty in your customers and support the broader SME community without impacting your cash flow, or taking on greater credit risk.

As a small business, BNPL allows you to put any business payment, with any supplier, into one extended trade account, with optional instalment terms and total flexibility. By grouping payments together, you can gain a clearer view of your operating situation. Flexible repayment terms mean you can break down your business purchases amounts into small chunks of manageable repayments.

It’s no surprise that flexible trade credit and adaptable payment solutions that aid cashflow are the way of the future. The current environment has only sped up the take-up amongst the SME community, as businesses are stretched to their limit amidst the economic downturn. For businesses who are struggling, it’s important to know there are solutions available, whether that be from federal or state government, the industry or within your supply chain.

Tom Whitworth, Chief Product Officer, Finstro

This story first appeared in issue 29 of the Inside Small Business quarterly magazine