The availability of appropriate access to finance for SME manufacturers is important. But focus on the channels for growth capital risks overlooking the link between working capital management and the external considerations affecting it.
In all businesses, cash is king. It provides liquidity to run operations and impacts the funds available for capital re-investment, innovation and growth.
Money tied-up in extended customer payments is not available for investment in the business and the more that is tied-up, the greater a company’s reliance will be on external growth capital instruments – such as those dubiously accessible via banks.
Furthermore, the demands on working capital increase markedly as an economy moves from recession/stagnation to growth. The acuteness of this increase is in proportion to the difference between receivables and payables.
This concern would be reduced if payment terms were balanced, but many SMEs are stuck between a rock and a hard place. Large OEMs are demanding extended payment terms (typically 75-days to 120-days) while second and third-tier suppliers into an SME can only trade if they are paid quickly, typically 30-days. To attempt to match terms in either direction either loses an SME a customer or a supplier.
Banks and the mechanisms for small companies to borrow affordably, matter. But the roles and responsibilities of our OEMs and primes cannot be overlooked simply because there’s too great a risk to air the concerns.
The growing payments gap leaves SMEs looking to banks to help fund the shortfall at inevitably higher costs of borrowing than for the OEM. The total end-to-end cost of the supply chain is thus increased, and through under-investment, is less competitive than it could be.