Supply Chain Finance: too good to be true?

The system designed to pay suppliers earlier and charge buyers later has met with plenty of cynicism, especially from smaller businesses. But could they be on to a winner?

For SMEs, commissions from large scale companies can be a poisoned chalice. Lucrative contracts are an obvious draw, but crippling payment terms can leave businesses with limited capital struggling to survive for months on end. The purpose of Supply Chain Finance (SCF) is to bridge this gap by allowing suppliers to sell approved invoices to banks, who then collect the money from the buyer at a later date. In this way, the theory goes, suppliers get paid within a reasonable time frame, buyers can set convenient timescales for payment, banks receive a small processing fee – everyone’s happy. So why the resistance?

Unfortunately, some major companies have been accused of using the SCF label as a cover for dubious payment schemes that disadvantage their suppliers. Last month, The Forum for Private Business threatened to add Mars UK to its “Hall of Shame” after the company allegedly extended its payment terms to 120 days, but told suppliers that they could be paid within 10 days if they reduced the amount. Phil Orford, the Forum’s Chief Executive, said that he was “concerned” about the accusations and that, whilst SCFs can be beneficial, “they should not be used as a justification for a company extending payment times to its suppliers.”

Delayed payment schemes like this one are certainly worrisome – it’s easy to see how a large buyer holding the cards can keep extending their payment terms in the hope of squeezing out a discount from a hard-pushed supplier. However, it’s important to make a distinction between these and genuine SCFs, which involves a bank partner and allows suppliers to claim 100% of the invoice total.

What’s more, SCF is clearly a much-needed intervention. According to the British Banker’s Association, invoice discounting, where suppliers sell their invoices direct to banks without the buyers’ knowledge, is growing by 20% – despite the fact that this offers less flexibility and higher fees than SCFs. Meanwhile, despite 82% of SMEs saying they do not want any form of bank loan, peer-to-peer lending is doubling in popularity, suggesting that cash flow issues are still of great concern to SMEs.

SCF offers an excellent opportunity for suppliers, buyers and banks to benefit from a tricky situation. But, if they are to work, larger companies need to do more to win the trust of SMEs.

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