Alternative finance flourishes as terms squeeze continues

Figures from Demica claim UK companies are securing cash on invoiced debt as credit and cashflow remains a headache

Terms of endearment: many large enterprise customers are pushing payment terms out as far as possible

Faced with scarce bank credit and customer payment terms being pushed to the limit, many firms are turning to finance secured on outstanding debt, research has claimed.

Figures from technology and finance services firm Demica claim 65 per cent of UK businesses feel they will lack the working capital to take advantage of economic recovery. This compares with 59 per cent of companies in Germany and 62 per cent of French firms.

Demica claims that half of enterprise customers continue to try to push payment terms out as far as possible. But three in five UK companies claim payment periods will not bear any further extension.

Businesses' supply chains have also been destabilised, with almost half of UK firms reporting an increase in supplier failure during the past year. Failure rates are not expected to improve until next year.

The withdrawal of credit insurance has also hit hard, with 69 per cent of businesses in this country reporting reduced lines from underwriters. Eight in ten UK firms also report continued problems in obtaining bank finance, with availability not expected to improve until December.

Demica claims that many firms are turning to supply chain finance (SCF) as an alternative source of cash. SCF is ordinarily secured against outstanding invoice debt in a company's supply chain, and Demica claims it allows large enterprises to extend credit terms with suppliers.

UK firms are seemingly ahead of the curve when it comes to SCF, with 34 per cent having used it for a number of years. This compares with a quarter of continental companies. A further 11 per cent of businesses in this country have explored SCF options in the past year, according to Demica's research.

Phillip Kerle, chief executive of the Demica, said: “Scarcity of traditional credit continues to be a headache for firms in the supply chain, especially for those who had previously been able to rely on low-cost, readily available liquidity, and on credit insurance.

"Not only is SCF allowing [firms] to substitute for part of the current squeeze on normal lines of credit, but to generate enough capital to prepare for better times ahead."