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The credit conundrum

As political events and natural disasters threaten to undermine the confidence of the financial sector, Michael Barker asks whether it will become even more difficult for the fresh produce industry to gain trade credit in future

In the months following the collapse of Lehman Brothers in late 2008, businesses used to a certain way of operating financially suddenly found their world had become a great deal more complicated.
As banks struggled and the finance sector re-evaluated what sort of companies they should be lending to, fresh produce businesses found themselves on the wrong end of often blanket trade credit bans. 
As the dust cleared, things started to improve, but with the impact of natural disasters in Japan and New Zealand against the backdrop of major political instability in North Africa and the Middle East, to what extent will notoriously skittish financial traders look to rein in credit once again and add a further headache for growers to deal with?

According to Richard Lim, an economist at the British Retail Consortium, things have improved considerably since the bad times of 2008, when lenders made mass withdrawals of trade credit to the food industry. “It was a big problem at that time,” he says, “but the situation improved significantly towards the end of the recession and suppliers and retailers are now working more closely together.”
That collaborative model was one of the few plusses to come out of the economic downturn from a food industry perspective, Lim claims, and this new way of working will serve suppliers well if the financial market tightens up again. “Relationships have been formed now, and credit insurers have also learnt to have better relationships.”
However, that optimistic view of the new world is not shared by all. Liz Bowles, regional manager for EFFP, argues that everybody selling food to the supermarkets is having to deal with tighter credit control, with customers particularly cracking down on overdue invoices.
“It’s all getting tighter,” she says. “Banks are reining in what credit they give. It doesn’t matter if you are a good business or not. Banks are being given the edict, and are looking to offer loans instead of overdraft agreements.”
With the rapid rise in input costs such as fuel and fertiliser – a trend that only looks likely to continue further – and growers working on often wafer thin margins, banks are nervous about lending to the horticultural and agricultural sectors for fear of not getting their money back, she warns.
“Lenders look at risk and the level of risk associated with that business,” she adds. 
“Agriculture had traditionally been seen as one of the least risky sectors to lend to. But right now growers are in a very difficult position. They can’t seem to pass on production cost increases to their customers so margins are getting squeezed even more.
This creates a “vicious circle” in which growers are not making enough profit to reinvest, therefore cannot modernise their operations to enable them to make better margins and be more attractive to lenders, she explains.

 This will inevitably lead to some business failures.
Should the banks treat fresh produce suppliers differently to other sectors, such as hard goods manufacturers, and accept that there are many solid and long-established businesses working on low margins that would still be reliable to lend to?

 Bowles argues that, taking a cold business perspective, probably not. 

“Banks are far more cautious than they used to be – probably more cautious than they need to be, but given where the price of fuel, feeds and fertiliser is going it isn’t looking too clever. If you were lending to some in the protected and field veg sector you wouldn’t know if you were going to get your money back.”
Bowles’ advice is to open a proper dialogue with customers and look to persuade them to trade on a different basis, understand the supplier and their needs in a similar way to what Lim outlines. 

Bowles agrees that this has happened in a few cases, but it still needs to happen more.
From the banking sector’s point of view, it is still a case of business as usual, according to Guy Reeves, relationship director at Lloyds Bank, who insists that credit is very much still available.
“We are still looking to support suppliers with the full range of products and services that we offer,” he says. “The economy remains challenging but everyone is adapting to the ‘new new’.
 Essentially, banking is very simple. If a proposal [for credit] stacks up, it stacks up. 
There’s always a lot of ill informed press commentary about the banking sector, but ultimately it comes down to what the proposition is. People still need to eat.”
Fresh produce recently had the ignominy of being named by credit insurer Atradius as the number-one sector for fraud after higher-value goods clamped down on traceability. 
Here, Louise Cochrane, fraud officer at Atradius, outlines what the company looks for when detecting the problem. 
These aspects are often harmless in isolation but when combined can arouse suspicion:
• usually small companies
• recent changes in ownership
• move from dormant to trading
• change of activity
• frequency i.e. several limit requests in a short space of time
• buyer contact too frequent, too helpful/willing to supply additional information
• conflicting trade sectors e.g. a fruit and veg wholesaler purchasing shoes, computers, cosmetics and flowers
• first year accounts being too good to be true.
On the flip side, the list below contains a few factors that suppliers can look out for and monitor to raise awareness and reduce vulnerability:
• buyer is generally not interested in price/no negotiation
• low value order or following payment of several low value orders, a one-off much larger request
• unusually short period between first contract, order and delivery requested
• buyer collecting goods themselves often in unmarked vehicles
• a request to change a delivery address at the last minute
• conflicting sectors, the buyer being in a different trade sector to the supplier.
Cochrane adds: “We also recommend that if suppliers feel they have been hit, in the first instance report it to the police, but also report it to Action Fraud, which is the UK’s national fraud reporting centre run by the National Fraud Authority, the government agency that co-ordinates the fight against fraud.”


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