Research published by Barclays in January found that 85 per cent of the UK’s small and medium-sized enterprises have experienced late payments in the last two years. Late payments had caused 20 per cent of these companies to suffer extreme stress – and 11 per cent had nearly failed as a result.
Even when companies pay their suppliers in accordance with the agreed payment terms, the wait can be significant. According to the Forum of Private Business (FPB), Sainsbury’s recently extended its payment terms from 30 days to 75 for non-food suppliers, while O2 has been criticised for extending terms from 60 or 90 days to 180 days. Many other companies have taken similar action.
Receiving funds several months after submitting an invoice can put small businesses under considerable pressure and there is a growing realisation that this is not good news for the purchasing company either. Suppliers may respond to the pressure by raising prices or refusing orders: 20 per cent of companies surveyed by Barclays said they had turned down business from customers because of late payments. Suppliers may even go out of business because of cash-flow problems, which can in turn leave their customers unable to fulfil their own orders.
Against this backdrop, the concept of supply-chain finance has gained remarkable ground in recent years. In a supply-chain finance arrangement, the corporation’s bank finances the supplier’s receivables. Such a structure might work as follows: the buyer approves the supplier’s invoice; the bank advances the value of the invoice to the supplier; the buyer then pays in full at the agreed payment term (60 days for example). Under this arrangement, the supplier receives financing based on the credit rating of its customer, which typically results in a lower cost of funding.
The idea is to have the option of getting funds significantly earlier than the large corporation might pay
While supply-chain finance offers considerable advantages for suppliers, not all programmes work as planned. “There are a number of programmes in the market which are not considered to be successful because of low supplier take-up,” says Adrian Rigby, HSBC’s global head of receivables finance and supply chain. “Some suppliers actually don’t like being within a programme and are happy to arrange their own working capital. Others may be supplying a number of major customers and find entering one programme too narrow.”
Another obstacle is the lack of global standardisation, says Kah Chye Tan, global head of trade and working capital at Barclays. “Letters of credit have been around for hundreds of years, and globally they are governed by the same set of rules and practices issued by the International Chamber of Commerce,” he says. “This level of standardisation does not exist in supply-chain finance and that’s a big inhibitor.”
Nevertheless, banks are reporting that interest has grown significantly in recent months. According to a report published by Misys in 2012, 88 per cent of banks say they are seeing demand for supply-chain finance from corporate customers.
“We’re seeing an unprecedented level of interest in supply-chain finance,” says Jeremy Shaw, J.P. Morgan’s head of trade finance for Europe, the Middle East and Africa (EMEA). “Following the financial crisis, we saw an increase in interest, but the take-up still wasn’t anywhere near the level anticipated. In the last year, this has accelerated and I would say that around 50 per cent of top corporations either have programmes in place or are looking at this topic very proactively.”
Meanwhile, other financing models which can broadly be classed as supply-chain finance have also gained popularity among corporate buyers and their suppliers. With large companies holding high levels of cash, some are looking to put their funds to work. One option is using that cash to finance suppliers by taking advantage of early-payment discounts. Platforms have been developed which allow suppliers to exercise dynamic discounting, giving them more control over which invoices are discounted.
Others, like OB10 Express Payments, combine dynamic discounting with the option of using third-party financing. “With a portal like ours, suppliers send their invoices and are able to track their status instantly,” explains Luke McKeever, chief executive of OB10. “The next step is to say, ‘I can see it’s been approved, but I’m not due to be paid for another 54 days – but I see there’s a pay-now button’. The idea is to have the option of getting funds significantly earlier than the large corporation might pay.”
Another interesting development is the arrival of the “eBay for receivables” model, whereby companies can auction their receivables on an online platform such as MarketInvoice. “Since we launched two years ago, we have processed invoices to the value of more than £40 million through the platform,” says Anil Stocker, MarketInvoice’s co-founder.
Development in this area continues. Last October, Prime Minister David Cameron announced the creation of a government-run supply-chain finance scheme designed to help small companies’ cash flow. A number of companies have reportedly signed up, including Vodafone, BP and Tesco.
