Since the start of the financial crisis in late 2008, banks have become increasingly wary of lending to small businesses, fearing that they would never see a return on their loan and thus plunge the economy into further dire straits. However, while this may be a sure fire way of protecting themselves from financial ruin, it is causing a significant problem for small suppliers to the British manufacturing industry, all of whom require some level of cash input to allow for the expansion needed to further growth.
As a result, some of Britain’s top manufacturing firms have been forced to invest in their suppliers first hand – often amounting to millions of pounds that could have been used to further their own companies in the international market.
For example, financial director of Rolls Royce Mark Morris revealed this week that the aero-engine company has so far lent £500 million to its small suppliers who have not been able to acquire bank loans. This is a huge leap for a company that, up until the recession really took hold in 2009, had not lent anything to the businesses from which it receives essential equipment.
Similarly, pharmaceutical company GlaxoSmithKline (GSK) has set up a chain financing system, allowing suppliers to the drugs giant to borrow money at the same rate GSK pays.
For suppliers struggling to expand their businesses and achieve greater access, such measures by large companies can be something of a godsend. With businesses in the UK and across Europe forced into administration on a daily basis, even though the economic situation is beginning to improve, those who have access to a loan should they need it can focus on improving, rather than worrying about their finances.
Yet the loans made to small suppliers by big businesses, when combined, is estimated to run into billions of pounds – money which should be being channelled into the expansion of British firms on the international stage rather than bailing out their suppliers.
Mr Morris agrees, saying; “We are happy to kick-start things but it is not a long term solution.”
It is not only manufacturing businesses which have put measures in place to protect small suppliers, however. The Society of Motor Manufacturers and Traders (SMMT) has established a programme which allows component firms supplying to factories to boost their revenues, thus negating the necessity for a bank loan in the first place.
The SMMT are also taking steps in forging a stronger relationship between suppliers and banks, with a meeting between the two parties set for next month. It is hoped that, once banks realise how integral a role suppliers play in the expansion of the automotive industry in this country, they will be more willing to finance the supply chain.
As large manufacturing companies, especially in the automotive industry, continue to expand at a rapid rate, it is more important than ever that a steady stream of supplies can be delivered to their factories. As Movehut has previously revealed the British automotive industry is now one of the most successful exporters in the world, but there are fears that expansion may be limited by the unwillingness of banks to fund further expansion in the lower levels of the chain.
Even businesses which are not currently lending to suppliers have been forced to intervene on the smaller companies’ behalf, contacting the banks and providing references in order to allow a loan to go through. Honda, which is rapidly expanding in the UK and requires a mounting number of parts from suppliers, is one such company.
Dave Hodgetts, managing director of Honda UK, says; “We have spoken to banks on behalf of trusted suppliers.
“We are happy to take similar action again to preserve long term relationships.”
Of course, the intervention of large companies in banking disputes can often be invaluable, but there is no guarantee that it will encourage the banks to lend to small firms believed to be high risk. It is then that, like Rolls Royce, the manufacturer has to step in and lend financial assistance.
However, as Mr Morris points out, this leads to the manufacturer shouldering the credit risk as well as taking a gamble by trading with smaller companies. The real worry, then, is the potential collapse of the small suppliers when companies tire of the risk and work solely with large suppliers.
Do you think banks should loosen up their lending policies for suppliers to successful industries, or does this carry too high a risk for a country slowly emerging from the longest recession since war time? In which case, do you believe that it is up to the large manufacturers at the top of the chain to help small suppliers make up the financial shortfall?
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