Carillion crisis proves that SMEs are on a knife edge

Here, Graham Toy, CEO of the National Association of Commercial Finance Brokers, explores how the Carillion crisis could spell disaster for British SMEs.

The quick and public demise of Carillion has been chewed over from every angle since the developer’s compulsory liquidation a couple of weeks ago.

Amidst the gloom in the aftermath of the collapse was the government and industry’s relatively rapid response to how this would impact the thousands of suppliers that were put at risk following the failure of Carillion.

Days after the announcement from the construction giant, a £225 million ‘lifeline’ from banks was extended to small business customers to ride out this crisis. To the estimated 30,000 businesses that were reliant on Carillion in some form or other, this quick thinking will have saved a good number of these SMEs from being dragged down alongside the developer – with the company’s unpaid debts to its contractors in the vicinity of the hundreds of millions.

The Carillion saga is proof of just how often small businesses can find themselves on a precarious knife edge.

While the government and banks are to be praised for their rapid response to this crisis, this scenario is doomed to repeat itself unless we see an attitude shift to how small businesses are treated in the wider economy.

One of the central issues around Carillion’s collapse that has raised its ugly head again is how the public sector continues to place such an emphasis on larger firms during their procurement processes.

With the government now having to scramble to satisfy contracts on high-profile projects like HS2, it’s clear that public sector procurement needs to diversify and spread their risk beyond these massive firms.

This has been raised time and again. Plans to diversify the building sector to more fully include SME firms has been a hallmark of Government policy over the last couple of years – the public sector’s own procurement processes have been more conservative – failing to practice what they preach – instead relying on ‘safe bets’ in the form of existing suppliers.

Business fallout

The unwinding of Carillion also underlines how susceptible small businesses are to fallout from bigger businesses and the economy.

This will always be the case to some extent – small businesses don’t usually have the fiscal buffers that their larger counterparts do. However there is a feeling that SMEs, which are often rightly touted as the backbone of the economy, need to be better sheltered from adverse headwinds.

Financial awareness and planning are vital here. As it stands, the majority of small business leaders have quite a narrow view of the funding available to them. Nine out of 10 SMEs still go to their main bank when they need loans to grow the business.

This compounds the concern that small businesses simply aren’t aware of the diversity of finance available, and therefore feels obliged to increase their exposure to risk by sticking with just one lender.

While initiatives like the Bank Referral Scheme has stepped into the breach to, in theory, help rejected loan applications have a second shot at funding, there’s still a big worry that not enough is being done to help SMEs find the finance they need.

Supplier problem

For Carillion’s beleaguered suppliers, the prospect of being unpaid for work done will be a big concern. Central to their worries will undoubtedly be the question of how they can replace this vital revenue and keep cashflow looking healthy.

In the short term, affected small businesses might want to look towards lending facilities that help bridge the gap and keep their business moving. Invoice discounting products allow small businesses to borrow against the value of unpaid invoices to make up for a shortfall in cashflow.

Other SMEs might want to think more about the likes of asset finance to avoid tying up their cash in replacing or buying business-critical equipment while they look to balance the books. This also helps companies safeguard their finance by keeping their cash free for when it’s really needed.

In the wake of Carillion’s fall, there will undoubtedly be a period of soul-searching in the government and the construction industry as to how this sort of scenario can be avoided again.

Central to that will be the question of how the demise of one big business can be stopped from impacting countless other dependents.

While the Carillion effect will see small businesses warily reviewing their own operations to see how reliant they are on bigger accounts, it should hopefully act as a catalyst to policymakers to encourage SMEs to really think about their finances.

The hard truth is that not enough has been made of the routes to finance that are available to small businesses, meaning that SMEs often find themselves with cash tied into assets or being held by clients, and don’t know where to turn. Awareness about funding is key to making the SME sector bullet-proof, and it’s something the government should focus on for the year ahead.

Graham Toy is CEO of the National Association of Commercial Finance Brokers

Further reading on the Carillion crisis

Owen Gough, SmallBusiness UK

Owen Gough

Owen was a reporter for Bonhill Group plc writing across the and titles before moving on to be a Digital Technology reporter for the

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