There have been a number of high profile company failures so far in 2018, most notably the collapse of the construction giant, Carillion. What hasn’t been as noticeable is the much broader trend of rising insolvency that is affecting nearly every sector of the UK economy. Businesses all over the UK are increasingly finding themselves out of pocket, and many have been forced to close their doors as a result.
This increase in insolvencies hasn’t had major visible effects for consumers or most workers so far, because it has been offset by economic growth factors, with sales, net worth, and employment figures trending upward in most industries. Small businesses, particularly those in the supply chains of these affected industries, however, are feeling the effects.
Insolvency can have a knock on effect
While the greater economy is stable, suppliers are being squeezed by the increase in insolvencies. This isn’t because they don’t have enough clients, but rather because existing insolvent customers can’t pay their bills. This results in increasingly late payment times and financial pressure on those suppliers. If this continues long enough, or suppliers are forced to deal with multiple such cases at once, they might be forced into bankruptcy as well, passing the problem on to their own suppliers. Those who survive are still left with less reliable revenues, and an increased vulnerability to other cash flow interruptions.
Even in an industry that’s stable in other respects, these insolvencies can create a domino effect that propagates down the supply chain. The broader result is a period of financial instability in the affected industries, where businesses fail and are replaced by new competitors at an accelerated rate.
Small businesses are being tested
For small businesses in these industries, this instability is both a serious threat and an opportunity. Because businesses are failing even as their respective industries are growing, their departure leaves a demand vacuum that remaining competitors can grow into. The collapse of Carillion, for example, creates enormous opportunities for other construction firms, who are now free to take on the large government contracts that the company has left behind. Further, those of Carillion’s former suppliers who survived the transition will also be able to move into the markets of those suppliers who folded as a result of it.
Of course, surviving this type of upheaval may require a significant amount of preparation. Business owners who want to capitalise on these events need to find ways to make their businesses more financially resilient, and better able to quickly seize growth opportunities that arise.
Suppliers need strategies to protect themselves
As businesses continue to go under in the coming months, companies in those business’ supply chains need to develop strategies to protect themselves from being pulled down after their clients. That means finding ways to make your business more resilient to cash flow shocks, as well as taking steps to mitigate the amount of damage any single failing client could do to your business. This buys suppliers the time and resources they need to recover from any setbacks, which is the most important factor for businesses in industries that are still growing.
Diversify your clientele
In an environment like this, businesses who build their company’s success on one or a few very large contracts are at a big disadvantage. If your business suddenly loses a big client, and 40 per cent of its revenue, with no clear indication when remaining outstanding payments will be made, it can easily find itself slipping into default as well.
It’s a good idea to take steps to develop a diverse clientele, so that any sudden losses have a smaller relative impact on your own operations. Businesses who don’t have this option need to take appropriately major steps in finding financing solutions that can protect them in the short term.
Prepare financing solutions
One way to get access to a relatively large amount of funding is by using a standby finance facility. This allows you to negotiate a loan in advance, against the possibility of needing it at a later time. The loan can then be taken out at a moment’s notice, when it’s needed. Ideally, though, businesses can keep costs more contained, relying on faster and more flexible alternatives.
Invoice financing allows businesses to finance an outstanding invoice through their financial institution, who pays them for most of its value up front. The financial institution will then deal with the issue of collecting the debt from the client, while you can go on doing business. Supply chain financing, on the other hand, attacks cash flow problems from the other end. Instead of paying suppliers directly out of their available working capital, businesses can use a credit fund that can be paid off at a later date. This gives businesses the funds to keep their own bills paid while they adapt to any sudden changes.
Besides protecting themselves against the potential failure of important clients, this also gives businesses the tools they need to seize growth opportunities. As less well-prepared competitors fail, a business with access to flexible cash flow solutions can more easily invest in itself to move into recently vacated markets.