Balls Brothers crisis worries suppliers

Banks are under fire for not lending to small businesses but how much can small businesses themselves lend to each other?

Trade credit is a temporary loan from a supplier to a retailer to fund the purchase of goods. The risk is that the lender will be left without the goods or the payment.

This week’s report in The Times that London wine bar operator Balls Brothers was in crisis talks with Barclays Bank has sent shivers down the spines of many in the drinks sector.

The report suggested that not only is Barclays owed about £7 million but also that a corporate restructuring specialist appointed by the bank has so far been unable to find a source of new equity for the business.

When a company fails, the banks, as secured creditors, are second only to HM Revenue & Customs at the head of the queue to be paid out. Suppliers, as unsecured creditors, are at the back of it. This can mean painful – even terminal – losses.

Those left holding the baby when First Quench went under in 2009 for nearly £50m received just 1.4p in the pound, although some trade creditors were able to salvage their stocks. So miserable was First Quench’s credit rating before it eventually failed that many in the trade had stopped supplying what was then Britain’s largest independent drinks retail group.

Its business model was shown to be so flawed that only 400 or so of the 1,400 shops found buyers (not necessarily drinks retailers) or new tenants and so the administrator handed most of them back to landlords as having no potential value to First Quench’s creditors.

When Hayman Barwell & Jones failed almost two years ago, it was bought out overnight by Coe Vintners, which has recently started to promote the Barwell & Jones trading name. That has added to the anger of unsecured trade suppliers who earlier this month received a payout of 5p in the pound. They expect no more. The administrator, Larking Gowen, retained £105,390 from the available funds to meet its fees.

Earlier this month Simon Taylor of Stone, Vine & Sun in Hampshire attacked the “amateurs” clogging up wine retailing and said he wished the recession had sent more of them to the wall. He may soon get his wish.

January and February are always known as the most difficult months in the trade and the rise in the rate of VAT to 20% will make them no easier in 2011. Small companies, including independent drinks retailers, generally find it harder to adjust to straitened times than their bigger counterparts and insolvency practitioners are expecting an increase in corporate failures in 2011.

That puts suppliers on the horns of a dilemma. Do they meet orders in the run up to Christmas and risk not being paid in the New Year or do they decline to supply what they perceive as potentially riskier retailers and lose potential profit? Margins are thin in the first place so making the right call is vital.

That is why so many more are now operating on a “cleared funds” basis for customers other than those with the most solid track record of payment. The goods stay in the warehouse until advance payment is received. The problem with that, however, is that it squeezes the cash flow of businesses already on the brink and pushes them closer to the abyss.

Finance on Friday, 26.11.2010