Keeping supply chains running financially smoothly in these extraordinary times

For transport and logistics professionals, the usual moves in the supply chain chess game may recently have felt like leading to a Covid-19 stalemate.

Some sectors have seen extraordinary rises in demand, whereas others have seen worrying drop-offs, resulting in many in the logistics sector working under extraordinary pressure.

As with many industries, coronavirus has not only presented its own set of challenges, but has brought existing vulnerabilities to the fore. Many issues that previously trundled along in the background have now taken centre stage.

This is particularly true in supply chains where creditors can be reluctant to provide credit and debtors can lack the cashflow to pay up. Where there are serious financial issues, supply chains themselves can be put at risk.

The UK’s new Corporate Insolvency and Governance Act 2020 renders termination clauses related to insolvency unenforceable. This means suppliers in all industries can no longer make continuation of a contract conditional on their insolvent customers settling invoices unpaid before they went insolvent.

As for the latest government guidance (non-binding) on responsible contractual behaviour, this includes “being reasonable and proportionate” over performance issues and the enforcement of contracts, and “acting in a spirit of co-operation”.

So how can professionals in this industry keep the supply chain oiled and running as smoothly as possible during such extraordinary times?

Suppliers should certainly review their terms for termination clauses, especially their force majeure clause (which, in effect, frees both parties from liability or obligation in an extraordinary event).

Perhaps the most important thing for those running the supply chain is to be upfront and honest with their suppliers and customers. But it’s also very wise to get to know them and their business as well as possible, and there are a number of ways this can be done.

Ensure you undertake ‘Know Your Customer’ checks. Don’t be afraid to delve into Companies House and take a good look at them. They may also have a track on credit-checking sites.

You could also consider setting up a ‘traffic-light’ system, which tells you where performance is on track and where not, depending on the health of your customer.

Credit-control systems – we at Moore Barlow use a cloud-based software system from RSM called Tracker – allow you to “monitor” the financial performance of a company, meaning you get alerted if the credit score declines, or if there’s an adverse record registered, such as a CCJ [county court judgement]. This allows creditors and debtors to act swiftly and engage with their customers.

As for measures to offset problems with payment, it’s worth exploring changes in payment and credit terms for new customers, such as introducing larger deposits or payment up front. Maybe creditors and suppliers can offer extended payment terms in return for a payment on account. Additionally, you should check your insurance policies, as you may well find you have suitable cover here.

If cash flow is a concern, you could agree special repayment terms with struggling customers and, in the aforementioned spirit of co-operation between parties, if things turn disagreeable, consider the early use of ADR [alternative dispute resolution – solving disagreements without legal proceedings]. Equally, consider earlier legal intervention to prevent delays, as this may well help focus the parties’ minds in order to agree a suitable arrangement.

While there is certainly a place for measures such as revolving supplier agreements and invoice-factoring agreements (funding cash flow by selling invoices at a discount to third parties), check whether they are beneficial or harmful to suppliers and or customers. Cases exist where a personal guarantee is attached to such agreements. This means the directors become personally liable.

In general, if a supplier or creditor is struggling financially, then they should not be afraid to seek advice from an insolvency practitioner.

This is guest post by Peter Worrall and Benjamin Millward, specialists in commercial debt recovery at Moore Barlow