Most firms just aren’t ready for the tsunami of changes around working capital which will hit British businesses this year.
This warning comes from Tony Duggan, chief executive of fintech firm Crossflow Payments, a company which acts like a cog between corporations, their suppliers, and funding providers – ensuring that suppliers don’t have to wait for a month or more to get paid.
Duggan’s warning is not just a reference to Brexit, but centres on the introduction of new payment practice laws, which will make it a criminal offence for a corporation not to make public whether it is paying suppliers according to the terms of the contract.
The code looks to stamp out problems with late payments. Ultimately it aims to improve the cashflow of businesses – largely suppliers – by making sure they are paid by their corporate customers on time.
But straight-talking Duggan says the new code could have severe side effects, prompting corporations to extend their payment terms even longer, which in turn will impinge on the working capital of suppliers.
“The new law has good intentions, but it fails to look at the impact on the real world,” he says.
Duggan doesn’t hold back when talking about the difficulties many firms stand to face in light of the change. He worries that this increased pressure on corporations could cause them to reduce their investment, over fears that they might be punished for not being able to meet the terms of the agreement. “If you want to push some companies over the edge, this is a great way of doing that.”
It’s evident that Duggan is a realist. Having helped bring home improvement retailer Wickes back from the brink in the 1990s, he clearly has a good understanding of the way a supply chain works. And it was during his five-year stint working for Wickes as a supply chain development director that he helped to build Europe’s largest B2B platform.
It’s this realism that seems to be the crux of Crossflow’s business model. The firm essentially fills the finance potholes by providing businesses with working capital, ensuring that they get a smoother drive. It might not sound glamorous, but a business like this is becoming increasingly important as the lending drought from the big banks shows no signs of abating.
This is how it works. When Crossflow receives an approved invoice from a corporation, it sends a request for short term cash to funding providers – such as hedge funds or pension schemes. This money is used to pay the supplier. The fund providers then get their money back once Crossflow is paid by the corporation.
Crossflow is a no frills sort of business; it’s basically a B2B version of peer-to-peer lending, and one that is currently pretty unique in the UK arena.
Duggan was determined not to make the mistakes he sees in other companies. It was important for him to “bootstrap” his business by not raising big sums of cash early on.
“When I look at the huge losses of many firms in our space, it frightens me. If I was them I couldn’t get up in the morning because I wouldn’t want to look at the numbers.
“The problem with a lot of these companies is that they got too much money too quickly, and instead of fixing a problem, they just threw money at it. But with our business, we’ve always made sure we fix any problems, and we’ve automated the process, which has given us huge scalability.”
And the company has now built a fan base. Having launched in 2014, Crossflow now has 1,500 suppliers on board, including some big names such as Maplin and House of Fraser.
The firm is also eyeing up opportunities overseas, and has recently launched operations in Hong Kong, Taiwan and China.
It’s clear that a company like this is going to become even more essential when the payment code comes into force in November. And it’s not just the content of the new law, but the timing that will prove difficult for many businesses. Duggan points out it could really hit hard come Christmas, a time when the need for working capital is at its absolute peak.
“I just can’t see corporates absorbing it,” he says, particularly bearing in mind some corporations will have hundreds of suppliers on their books.
In fact, if every supplier in the UK was paid what they’re due tomorrow morning, there would be £226bn pumped straight into the economy. This is a figure that shouldn’t be taken lightly, particularly amid the unrelenting worry that Brexit could tip the UK into a recession.
Of course, Brexit itself is causing a working capital problem, with 12 per cent of suppliers saying their payment terms had been extended since the EU referendum last year. Not to mention the impact of the fall in sterling, which means the cost of everything SMEs are buying from Europe now costs 15 per cent more than it did over a year ago.
“Companies now have to stretch their money a bit longer, and that can really kill a business,” says Duggan.
Worryingly, the vast majority of businesses aren’t ready for the payment code to strike, with research from YouGov indicating that three quarters of SMEs aren’t even aware of the payments code.
This is fast becoming a nail-biting issue. But Duggan seems ready and raring to alleviate this issue, with Crossflow acting as a cash engine that can stop businesses from breaking down. “Ultimately this is all about squaring the circle,” he tells me.
“Corporates are never going to be able to pay immediately, and we’ve just got to find a way to address the real world.”