Supply Chain finance for SME?s
Supply Chain finance for SME’s directly from PLC buyers?
Tom Keighley, Editor of Bdaily reported yesterday that David Cameron has suggested that SME suppliers to large PLC’s should be able use the PLC’s credit rating in order to raise working capital finance.
To be fair to the PM this, in essence, is a great idea – a small business becomes part of the supply chain for a huge Rolls Royce Trent jet engine supply contract and takes this contract to his Bank who then duly lends the SME the working capital they need to fulfil the contract, and better still, the money is lent at the same rate as that enjoyed by Rolls Royce PLC – which is probably one of the strongest covenants in the World and therefore has the ability to borrow at rates approaching Sovereign debt levels! Fantastic, end of subject, Every SME in such a supply chain situation no longer has any problem with working capital issues. We can all breath a huge collective sigh of relief. Superb, manufacturing gets a massive boost, and UKPLC makes a massive leap out of recession.
However, it just isn’t this simple. The Banks already sanction deals and support their customers in this way, but in order to do so the customer has to meet some pretty stringent guidelines. Under current Basel II guidelines in order for the Bank to rely on the credit rating of the main contractor, it must effectively be able to join in the contract, and be able to take the place of it’s customer in the event of failure of the SME, to collect the outstanding sums due. This is not as easy as it sounds and indeed many supplier contracts state that this form of novation is not allowed, or that all contractual payments are null and void in the event of any formal insolvency on the part of the supplier.
What we really need is for the Banks to be far more pragmatic and to look more closely at each supplier and the nature of their business. In many cases the risk of failure is minimal. The Bank should then satisfy itself that the supplier can perform the contract and deliver the ‘widgets’ as agreed. Once this is done the credit case should be straightforward.
In many cases that I see, the customer has failed to present their request in a way which their bank finds digestible, and so some of the responsibility lies with the SME to make sure that it gets it’s bank pitch right first time.
Hawkmoor would like to hear from you if you are in just such a situation. We may well be able to help you obtain the working capital finance you need.
Hawkmoor Associates Limited
This was posted in Bdaily's Members' News section by Phil Dibbs .
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