The figures from LDF, the finance provider, showed that the borrowing of SME food producers was up by 30% on the £1.32bn borrowed in 2010 and up 70% on the £1.01bn borrowed in 2006. SMEs are defined as companies with turnover of £25M or less.
Supermarket pressure
LDF said that supermarkets were under increased pressure with the growth of discount chains and the escalating price wars. The result was that they were putting pressure on producers to lower prices while many were imposing lengthened payment terms.
The financial supplier said despite implementation of the EU Late Payment Directive in 2011 and plans by the UK government to appoint a small business commissioner to deal with the problems late and delayed payments were still posing a challenge for smaller food producers.
Larger food producers often have greater leverage when it comes to negotiating prices and tackling payment issues with supermarkets, while SMEs are more cautious about losing business, it said.
“The government has taken some steps to address late payment but the impacts are yet to be felt by many businesses unfortunately. The jump in borrowing here helps to illustrate the extent to which it remains an issue,” said Peter Alderson, md of LDF.
“Increased competition has also put the big supermarkets under strain, which means more are paying food producers late, or cancelling orders last-minute. Borrowing more can help deal with the cash flow difficulties created.”
Artisan and natural
Increased investment was also needed by SMEs to meet the new demand for artisan and natural products, LDF said.
These products tend to require higher cost ingredients, new factory fit-outs and other investment to overhaul production methods.
While firms were benefiting from consumers’ willingness to ‘trade up’, there is a substantial capital outlay that needs to be made, LDF argues.
Financial management
LDF said that effective financial management can help small businesses deal with late payments and ensure they do not impact upon day-to-day operations, or long-term plans for growth and expansion.
Alderson added: “These issues need not cause a major problem. Effective financial and cash flow management, including use of finance, can help to alleviate much of the pressure and prevent temporary strain from impacting on long-term plans for growth.”
This information was collated by LDF from 600 food producers using data from Companies House.