The series of big-name retailers shutting their doors and going into voluntary administration at the beginning of the year garnered significant media coverage into the impact it will have on the retail sector and the greater Australian economy. In the last few weeks, these concerns have grown significantly, as the impact of COVID-19 has led to more and more retailers closing their doors indefinitely and in some cases standing down their staff.
However, while effects of COVID-19 and the new physical distancing restrictions now in place have been spoken about widely when it comes to retailers their staff and the general population, one area that has received less attention is the flow-on effects for many businesses supplying into retail including wholesalers, suppliers, manufacturers and processors.
For many of these businesses, unforeseen retail closures can result in numerous problems including:
- Sudden loss of income due to a retail customer going out of business or failing to pay debts due to financial difficulty
- Obsolete stock – for example having manufactured, processed or imported stock for an order, but that stock is no longer required by the retailer as a result of the retailer going out of business, what do you do with the obsolete stock?
This raises the question as to how, and to what extent, the challenges within Australia’s retail sector will impact businesses supplying into retail, and what steps they can take to minimise these impacts on their business.
For many the answer appears simple, ‘just ensure that all your customers pay their debts on time’, but in reality, it’s far from it. As more retailers experience distress, many wholesalers, manufacturers, processors and suppliers may face an increasing number of requests for payment extensions and extensions of credit lines putting them in a difficult position. If they don’t extend their credit line, they risk jeopardising relationships with their customers (who are often larger than they are). But if they do, they could be exposing their business to greater financial risk.
So, what can businesses supplying retailers do?
For starters, when business are faced with overdue bills or requests for extensions, it’s vital that they understand the options available to them. Many businesses supplying retailers are quick to extend the line of credit because they fear losing a customer, however, not collecting on your debtors negatively affects your cash flow (and ability to pay your creditors).
Moreover, extending a line of credit in the absence of vital financial information about your debtor exposes your business to greater financial risk because you don’t know the extent to which your debtor may be in distress and as a result the likelihood of whether or not they will be able to pay you back in the future. Often in cases where a retailer goes into voluntary administration, it’s the supplier or wholesaler who is caught off guard and the last to receive payment (if any money is left), so it’s important to be prepared.
What options are available for retail suppliers and how can they better protect their business?
1. Protect yourself with the PPSR regime and/or Credit Insurance
The PPSR has now been in effect for 8 years, however, we still regularly encounter suppliers to insolvent businesses that have failed to register their security.
For businesses supplying retailers, properly registering your interest can protect you when supplying goods to be sold, used in other products, or as a component. In the scenario that your customer is insolvent, the PPSR regime ensures that you would receive the financial proceeds for any goods sold by the retailer, or allow you to repossess the goods.
But, if you don’t register your goods and the retailer goes out of business, then you will be considered an unsecured creditor and as a result, may not be able to recover goods or proceeds owed. Unsecured creditors are often paid last when a business is insolvent.
With larger retailers, it is often a condition of trade that you cannot register security on the PPSR, in these instances an alternative way to protect yourself is via credit insurance. If you cannot get credit insurance for a particular retailer who also won’t permit PPSR protection you must be aware of the increased risk you face in trading with that party.
Finally, if you do register for the regime, it’s important to regularly review and renew your registration to ensure your business is always protected.
2. When entering agreements, think more like a bank
Formal credit agreements can have the added benefits of penalty interest and personal guarantees. Many smart suppliers are starting to think like banks when extending credit or entering into payment plans; requiring some form of asset-backed security.
Although, for smaller businesses with big retail customers, loan arrangements may be difficult to enforce due to the often imbalanced bargaining power between them. If you’re in this type of situation, we can provide specific advice to help you manage it.
3. Don’t make decisions in the absence of financial information.
Before extending a line of credit or entering a new supply agreement make sure you understand your customers’ credit position. An independent advisor can review the buyers’ financial position and give you independent advice as to whether or not you should extend the line of credit and continue to supply. This is particularly important now as recent changes mean that once you have offered a customer credit you have limited options to enforce collection of your payment as the Government has increased the time businesses have to respond to statutory demands from 21 days to 6 months.
Even if you are not able to improve your position, independent credit checks give you the power of information, ensuring that you can make the right decision for your business.
Should you have any questions regarding your business in light of the issues discussed, require an independent pre-lending assessment of a debtor, or need more information about how we can help you better prepare and protect your business, please contact our experts.
Prepare your business
How can your business respond to Coronavirus (COVID-19)?
Find out more