‘Perfect storm’ of trouble ahead for SMEs

According to the lender, this could be caused by stifled demand from lockdown combined with the impending Christmas rush to spend, and the need to be serviced by disrupted supply chains and interrupted cash flow.

It also warned that even businesses that performed strongly during the COVID-19 crisis are likely to experience significant logistical and cash-flow challenges over the coming months.

This demand/supply mismatch would most likely have the greatest impact on businesses that rely on invoices due to longer lead time for payment, such as manufacturers, wholesalers, and courier companies (which typically operate behind the scenes).

However, when these businesses fail to meet demand, the retailers that rely on them for their products, services, and distribution could also fail to meet it (including coffee shops, bars, gyms, and hairdressers, which are currently experiencing overwhelming demand).

As Tradeplus24 Australia managing director Adam Lane commented: “Consider a restaurant you’re keen to book a table at. There could be up to 20 wholesalers, manufacturers, and delivery business involved in your steak and chips with a beer.

“If the meat wholesaler doesn’t have the free cashflow to be able to purchase the meat before invoicing the restaurant, it makes for a very different meal – a vegetarian one no doubt.”

Mr Lane calculated that if a business that typically generates $10 million in revenue every year experiences a 20 per cent rise in demand under normal circumstances, they would need to have up to $1 million of liquid assets on their balance sheet to meet this demand.

He said: “But if this same $10 million business has also experienced a 50 percent reduction in revenue for the 12 months prior due to lockdowns, like many businesses have, then the probability of having the required level of liquid assets is materially reduced.

“With access to a line of credit at an annual interest rate of 7 per cent… this business could meet increased demand of up to 50 percent – even if it had just experienced 12 months of halved revenue.

“But if funding was to cost three times as much at 21 per cent – what many predatory SME lenders charge – then they would struggle to meet the new demand and the interest payments on the loan.

“Even worse, without any access to any funding, they will be effectively giving business to their competitors and slowing the rate upon which they can get back to pre-COVID trading levels.”

Options to manage cash flow

Steve Dowdall, the founder of family-owned pool products and services company Phoenix Oceania, said that he was inundated with demand for pumps, filters, heating equipment, and pool chemicals last year.

Mr Dowdall had to stock up on hundreds of thousands of dollars’ worth of components (often from overseas) to service this rise in demand before he could capitalise on the opportunity.

He said he had to implement a funding strategy to capitalise on the demand or turn away customers and risk losing the opportunity.

Mr Dowdall also found that lead times on supplies had increased from 21 to over 90 days due to disruption to local and international supply chains caused by the coronavirus pandemic. This meant he had to predict future demand while it continued to rise.

He said: “Using invoice financing to improve our cash flow based on our receivables – which were obviously immense at that point – meant we could capitalise on this growth opportunity without resorting to less desirable finance options, like re-mortgaging our house.

“As a result, we were able to service the avalanche of customers and orders we received, increasing the size and frequency of our inventory purchases by over 300 per cent on the previous year.

“That’s why affordable and fast financing options will be critical over the next few months to help these businesses not just survive, but thrive, with the increased demand we’re all about to face.”

[Related: SME fintech closes $25m raise to fund expansion]