Neil Ross, global head of Trade Credit at AIG, discusses the proactive steps that UK businesses are taking to offset Brexit risks, and how firms can use a new form of supply chain finance to augment working capital, especially in a constrained lending market.
Following the referendum results of 23 June, there is increased uncertainty in the UK and wider European business environment. While some firms are adopting a ‘wait and see’ approach to managing the fallout, others are actively preparing themselves for an uncertain future. By implementing a combination of strategies to ensure they are better prepared to protect against any downside risk and are able to take advantage of new opportunities that may arise, some companies are exerting control over their own future, even while the final settlement of Britain’s international trading arrangements is unclear.
Broadly these strategies fall into two camps: defensive strategies, such as increasing the access to working capital, and diversifying international supply chains; and forward facing strategies, such as strengthening alliances and relationships further afield.
The UK government has adopted a sensible strategy to managing the fallout from Brexit. They recognise that business must go on as usual, and that a separate project team must lead negotiations for the country as a whole. This means that the Brexit department must have extremely good communications with each of the other affected departments, so they can understand and articulate the position of the country overall. It’s a sensible strategy which many businesses can use. Some are investing time and resources now, to plan for an environment of increased uncertainty – especially for those businesses affected by international trade. The main areas of concern are focused on those parts of the business that have an international dimension; such as international supply chains, monetary control, staffing and employment and international sales.
Increased working capital and supply chain flexibility
Perhaps the most widely reported outcome of the referendum result has been the large fluctuations in the financial markets; with exchange rates and stock prices spiking erratically. This volatility may continue as the negotiations with the EU continue. For businesses that depend on overseas suppliers, especially those which operate on fine margins, these currency swings can be the difference between profit and ruin. For this reason, many firms are looking at derisking this area of their business, by increasing access to working capital and diversifying supply.
Responsible stewardship of corporate finance requires that businesses have access to working capital, especially in periods of uncertainty. It’s a tough situation for corporate financiers though; the most widely used source of funds – bank lending, has slowed – with regulations pushing lenders to increase their capital holdings, they are inclined to focus their limited scope for lending on the premium end of the market. For this reason, many treasurers and financial directors who work for firms not blessed with investment grade ratings are looking at alternative ways of accessing working capital. Their attention naturally has turned to the accounts receivable and accounts payable ledger.
Once considered a clunky and awkward corner of corporate finance, supply chain finance has been a major beneficiary of the global shift towards a digital economy. The near ubiquitous use of digital invoice management means that supply chain finance platforms can ‘plug’ into the accounts receivable or accounts payable data, and provide absolute clarity and granularity on payment and supply history to third-party lenders. This level of clarity reduces risk, and makes it much easier for lenders to provide working capital at an efficient rate, and at scale.
Importantly, supply chain finance systems were previously the sole preserve of the largest, rated firms – it has been tough for the financial market to lend to mid-market firms, as they do not have the ability to properly price the risk. This has now changed, thanks to a partnership between the insurance and the supply chain finance industry. Here, insurers can rate the risk of a buyer, just as they do when underwriting a trade credit insurance policy, and the supply chain finance platform can provide rapid access to reserves of cash locked in the accounts payable ledger. The largest provider of this type, PrimeRevenue, last year transacted US$140bn on its platform, which shows the scale and ubiquity of this as a cash management strategy. In the run up to the referendum, and since the vote was cast, AIG and PrimeRevenue has seen increasing interest in its flagship supply chain finance platform.
Beyond capital management, diversification of supply is an important strategy, but never easy. High-quality relationships with suppliers take time to build. For organisations that depend on a small cadre of key suppliers, the recent market changes represent a catalyst to engage in new or under-utilised relationships, further afield, or indeed closer to home.
The government is working hard to ensure that Brexit signals the development of enhanced relationships with markets further afield. Indeed, as Brazil, India, China and other markets continue to drive the bulk of international growth, buyers have long been facing the need to build more overseas relationships.
British interest abroad has some powerful advocates, many firms do not realise how easy it is to take advantage of the ‘soft power’ that the British government and consulate affords them abroad. There are opportunities overseas, and this is a good moment to seize them. For those British firms able to navigate these new international environments successfully, there is a tremendous opportunity to do well overseas – foreign markets are potentially hugely valuable suppliers, as well as markets for British products, services and talents.
While it is unclear how EU member states will react to the UK’s decision to leave, it is a fair assumption that those organisations with access to working capital, trade insight and flexible, resilient supply chains will have the best chance of navigating these choppy waters.
Focus on relationships
The pillars of a successful supply chain are strong relationships, which are steadily nurtured with as many elements of the chain as possible. It’s important to visit suppliers regularly, particularly in times of turbulence, to extend personal connections and reassure them that you are there for the long term. This is often financially advantageous, as suppliers are much more receptive to discuss ways of maximising efficiency and collaboration. In many cultures outside of Europe, personal relationships and networks are often even more important, so if you’re looking to increase your supply chain reach it’s in your interest to have this valuable bonding time.
In this period of uncertainty, it is tempting to ‘wait and see,’ but those firms who proactively manage the uncertainty give themselves the best chance of weathering the storm. By adopting a cross department approach to managing the key risks to your business, companies improve resilience. From our own perspective, we are hearing a clear signal from the market that supply chain finance is one part of an integrated strategy that the most proactive firms are using to mitigate potential shocks brought about by Britain’s decision to leave the EU.
About Supply Chain Finance from PrimeRevenue and AIG
Supply Chain Finance from PrimeRevenue and AIG provides funds that enable suppliers to take early payment less a small discount, while enabling buyers to standardise and potentially lengthen their payment terms. This provides low cost access to working capital on both sides of the transaction.
Until now, supply chain finance platforms have been limited to supporting the largest, investment grade businesses. Supply Chain Finance from PrimeRevenue and AIG is able to cater to the thousands of mid-market, non-investment grade companies, by providing financing with the credit risk insured by AIG’s market-leading trade credit insurance.
To find out more go to: https://primerevenue.com/supply-chain-finance-aig
Neil Ross, global head of Trade Credit at AIG: firstname.lastname@example.org