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Hard choices can keep the supply route open

Suppliers usually sell goods to large retailers on credit to ensure that, should the retailer go out of business, the supplier is able to insure himself against a loss.

Suppliers usually sell goods to large retailers on credit to ensure that, should the retailer go out of business, the supplier is able to insure himself against a loss.

As a consequence of the recession, it is becoming difficult for suppliers to obtain the levels of insurance cover they require, as insurers take a pessimistic view of the risks of trading in the retail environment. 

So what can the beleaguered retailer do to ensure his suppliers are willing to supply the products he needs? His choices are: to change suppliers to one that will offer credit; to order less stock; or to pay more quickly, potentially by increasing the level of funding from the bank. Figures from the latest SME Finance Monitor report – based on a quarterly survey of bank lending in the UK – show that a ‘magic circle’ of established businesses with existing credit facilities and sound fundamentals are able to access finance fairly easily, whereas first-time applicants find it much harder.

Loans are very hard to come by for SMEs with poor credit risk ratings. A simple reason for this could be that lenders are not easily able to extend credit to businesses on which they don’t have substantial amounts of information. Commonly, entrepreneurs fail to appreciate many of the factors that make a loan or overdraft application successful.

Indeed, the Monitor figures show that businesses seeking bank loans were more likely to be turned down if they were unprofitable. Conversely, businesses that were successful in raising finance were more likely to give the banks regular management accounts and retain financially trained staff.

To ensure access to the financial support they require, it’s more important than ever for retailers to produce high-quality information for lenders and insurers.

  • Marc Fecher is corporate finance partner at chartered accountant Kingston Smith

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