The third C2FO Working Capital Outlook Survey captures a paradox, one of uncertainty in business despite the rise in stock markets across the globe and economic optimism. This period of uncertainty for small and midsize suppliers (SMEs) is a shared reality of procurement professionals for many of the same reasons. Learn about the overlapping challenges and opportunities.
Trade policy and geopolitical uncertainty
Economic and political uncertainty top the list of potential barriers to growth, across the globe, except in China, according to survey data. The finding would contradict signals of economic recovery and surging global markets. But, 2017 was an unprecedented year on so many levels, including the specific issues SMEs cited; exchange rate volatility, Brexit, economic growth, interest rates, inflation, government policies, wages, and tax reform.
Economic growth should be a “good” problem for business, yet as the global economy finally takes off, SMEs may find themselves in waters uncharted for nearly a decade – funding growth as demand for their products and services rises while still meeting current customer obligations. Overall, SMEs indicated their need for liquidity will continue to increase. As demand for liquidity and growth increase, cost and consistency of funding will increase in importance, especially for SMEs in the U.S. and U.K. where interest rates are expected to rise.
Just as SME suppliers face challenges ahead, procurement professionals must also navigate volatile markets and evolving policies, as well as these supplier risks introduced by economic recovery — growth and increasing costs of borrowing.
SMEs identify regional concerns
- China: Production overcapacity
- France: Special constraints related to current regulations
- Germany: Tax increases
- India: Business difficulties, including ease of enforcing contracts, paying taxes, paying across borders
- Italy: Increased bureaucracy and corporate taxes
- U.K.: Increase in business taxes and directives
- U.S.: Wage or tax reform
SMEs expressed uncertainty over customer relationships
For China SMEs, the top concern centered on difficult relationships between customers and SME suppliers and vendors. This sentiment was shared globally, as concerns over customer relationships were a close second to geopolitical and economic issues.
This uncertainty may stem, in part, from a reported expansion in the number of customers imposing longer payment terms. According to the survey data, on average, more than a quarter of SMEs’ clients have extended payment terms. In the U.S. and U.K., the number of clients imposing longer payment terms on their SME suppliers doubled in the past year.
SMEs in the C2FO survey also reported that payment delays have increased in Germany, the U.K., and the U.S. SMEs in China and Italy reported the most significant payment delays.
Paradoxically, this trend occurs at the same time procurement professionals are navigating new policies regarding payment terms for the U.K. and the European Union. Both regions have moved to implement regulations that encourage large corporates to publicly report details on how promptly they pay their SME suppliers.
In 2017, the Prompt Payment Code (PPC), administered by the Chartered Institute of Credit Management in the U.K., reached more than 2,000 companies as signatories, including nearly 75 percent of U.K.’s FTSE100, an index of large British companies.
Technology offers challenges and disruption — and opportunity
Adding to the uncertainty, procurement professionals face a sea of change ahead with disruptive technologies. Yet these new tech solutions offer a path to accelerate the procurement agenda. As an example, dynamic discounting from C2FO offers a fintech solution to meet both regulatory pressures on payment terms and SMEs increasing needs for access to low-cost liquidity. The platform creates a direct relationship between corporates or customers and their suppliers/vendors, with no financial intermediaries, using a marketplace approach where suppliers choose the amount of discount to offer their customers in exchange for early payment, on-demand.
SME suppliers in the C2FO survey demonstrate increasing openness to such solutions. In fact, 75 percent of those surveyed were comfortable with early payment in exchange for a discount.
SMEs, eager to grow their business by accelerating their cash flow, increasingly demonstrate a preference for doing business with companies that are amenable to offering supplier-friendly accelerated payment options. More than 80 percent of SMEs surveyed agreed with the statement that “when deciding which customers to do business with, it is very or extremely important that your customers offer supplier-friendly accelerated payment options.”
Alternative financing sources that include accelerated payments in return for a discount are increasingly appealing to SMEs as a lower cost source of liquidity. In general, SMEs are leveraging more alternative finance options to fund their business.
For procurement, dynamic discounting offers improved margins, stronger supplier relationships and reduced financial supply chain risk. Corporates can also use dynamic discounting to meet the new reporting requirements as with the PPC. With dynamic discounting, payment is advanced directly to suppliers from the corporate customer, unlike supply chain finance or p-cards. This allows corporates to report shorter payment terms for compliance regulatory efforts such as Duty to Report and Prompt Payment Code in the U.K. and EU.
Turning uncertainty into opportunity
As we head into 2018, the only certainty is, well, more uncertainty. But, business is freshly recovered from a major crisis, and more resilient. Procurement leaders can embrace solutions that offer stability for SME suppliers and build value for their organizations. For every challenge, there is an equal opportunity to build certainty. In every risk, there is potential leverage to adapt, to innovate. And to succeed.
Learn more about the risks, challenges and opportunities for you and your SME suppliers in our full report, “The state of working capital for small and midsize enterprises: challenges and opportunities for the global economy.”