When the UK government announced late last month it would underwrite a £1.5bn loan guarantee to Jaguar Land Rover (JLR) in a bid to support the company’s suppliers, many of those employed across its supply chain might have thought the worst was over following the cyberattack that brought vehicle production to a halt on 1st September.
Almost a fortnight later though, details of exactly how this support will filter down have yet to be confirmed amid reports that the company has decided to loan hundreds of millions of pounds directly to its suppliers.
David Bailey, Professor of Business Economics at Birmingham Business School, says the planned state support doesn’t appear to guarantee funds will make their way to the furthest reaches of the supply chain.
“Many smaller supply chain firms face urgent cash shortfalls and in some cases banks have demanded personal security from business owners before advancing emergency finance,” he says.
Bailey notes the state guarantee does not create enforceable claims for JLR’s suppliers and that the company wouldn’t necessarily know the identity of second, third and fourth tier suppliers.
Treasury Today spoke to one of the firms that supplies JLR’s UK vehicle production plant in Solihull. A spokesperson for the company confirmed it has reduced shifts and laid off a number of temporary staff.
“We have had the chance to meet with politicians and this was highly appreciated,” he says. “However, it will be some time before we return to normal production levels. As for the government-backed loan, we have no details on how the loan will filter down the supply chain.”
Michael Beese, Managing Director of metal presser Genex UK, told the BBC that JLR accounts for more than two-thirds of its business as a second-tier supplier. He said he had been asked to put up a personal guarantee against a loan with a 16% interest rate and asked for clarity on how the state support would benefit small suppliers like his.
“A loan to Jaguar Land Rover that is used to stabilise its own cash position or to shore up tier one contracts doesn’t necessarily do anything to stop insolvencies further down the chain,” agrees Bailey. “The fact that some suppliers have been asked to put up personal property shows how difficult it is for them to convert goodwill into immediate cash.”
“If the government genuinely wants to ensure that money touches the parts of the supply chain that the loan guarantee doesn’t reach, it needs to couple the guarantee with some ‘bottom up’ targeted instruments and conditionality,” he adds.
As the example above demonstrates, many small businesses rely heavily on a single large client for the bulk of their business. In this context, every diversification – no matter how small – spreads risk and reduces exposure to single client issues.
A series of higher margin, smaller clients will at least keep cashflow moving if a bigger client fails observes Gavin Bates, an insolvency practitioner at Smart Business Recovery.
He believes the ideal solution for protecting JLR’s suppliers would have been a furlough scheme or direct financial support but acknowledges this was unlikely and would probably take too long to set up.
“Another option would have been for the government to work with JLR to order parts as usual where the government provided a stock loan facility to be paid back over a period of time,” adds Bates. “In this scenario, suppliers get paid as normal and therefore spread the disruption over a longer period of time.”
He says the most important step suppliers can take is to communicate with their employees, suppliers, landlords and HMRC.
“Stop all non-essential payments in the short term and investigate how you can lay off staff in the short term,” adds Bates. “Enter payment plans with suppliers and HMRC if necessary and talk to your bank and finance providers to get payment holidays or extended terms.”
