Protect against suppliers going bust

By HELEN LOVELESS, MAIL ON SUNDAY ENTERPRISE EDITOR
Updated:

 

Relying on third parties to deliver goods or services is usual for most small businesses. But with insolvencies soaring, many face being left in the lurch if a supplier goes under and they do not have contingency plans.

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Play it safe: Protecting against suppliers going bust is essential

According to accountant KPMG there were 3,225 insolvencies in 2008, up nearly 50% on 2007. However, business groups claim that up to 100 small firms are now going bust every day.

John Maltby, managing director of commercial lending at Lloyds TSB, says: 'Many businesses such as manufacturing firms are secondary, which means they rely on primary businesses for goods or services. If these suppliers struggle or go under it can have a domino effect on other firms.'

The first step for firms should be to assess the importance of the service or goods that suppliers offer and whether they will suffer if there is a break in the continuity of the service.

For example, IT services are likely to be key to keeping most businesses going, so having a back-up such as an alternative supplier is essential.

Choosing suppliers carefully is also important. Ensuring you are aware of how they operate can help firms to spot problems early.

Having several contacts at a supplier or service provider rather than just one person gives a more detailed view of what is going on.

Maltby also advises businesses to be careful about intellectual property rights. For example, if a company designs furniture but uses a supplier to make it, then it is important the design company ensures it owns the rights to its designs. If it doesn't it could be costly trying to buy these back.

Businesses that are struggling because of problems with a supplier-should also talk to their bank as soon as possible, says Maltby.

'Where the business is viable, banks are normally willing to help, providing you are clear about what is happening,' he says.

'If, for example, sales fall despite high demand because a supplier cannot produce the goods, explain that to your bank. Otherwise they may see a fall in sales and draw the wrong conclusion.

If suppliers seem to be struggling, consider carrying out credit checks before signing contracts that demand money in advance. Some experts even suggest offering financial help or support if suppliers are struggling, to prevent them going under and having a knock-on effect.

Andrew Taylor set up Specialist Glass in 2003. The firm, based in Huddersfield, West Yorkshire, makes toughened glass and has worked on projects including Manchester Airport and Liverpool University.

Initially the company bought the glass in and then toughened it. However, last year it decided to manufacture the glass itself.

Andrew, 42, says: 'We were dependent on two main suppliers, one of whom was a large organisation which was constantly shutting down branches. We felt very vulnerable as a result. It would have been catastrophic for us if they had gone under.'

As well as reducing its reliance on external suppliers, manufacturing the glass in-house has also saved the firm a 'massive amount'.

Andrew says: 'Although sales have remained fairly static, our bottom line has grown as a result of moving this in-house. We feel far less exposed to other companies' problems as a result.'

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