In recent months, various media outlets have shown significant interest in the prolific rise of Supply Chain Finance (SCF) and the impact these facilities have on small businesses. In this article, we will explore a timeline of events which occurred over the past year from; companies being accused of “bullying” smaller contractors, to the views of the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Kate Carnell.
Supply Chain Finance – The Facility in More Detail
Before we start, let’s take a quick look at SCF… SCF, or ‘reverse-factoring’, is a type of working capital facility provided by specialist financiers to large buyers/users of goods and services (such as large mining groups, telecoms etc). It works as a cash flow management program which these companies use to offer their suppliers immediate payment of their invoices for a small discount. Simultaneously, the user can then extend their payment terms out to 90 days to smooth out their cash flows.1
This provides a dual-functioning working capital benefit to both the big company and their small suppliers alike.
- The benefit to the company offering SCF to their suppliers is preservation of their own working capital.
- The benefit to the smaller suppliers is having the option to receive early payment of their invoices without having to apply for any lending through their bank.
What’s in it for the client?
- Increase revenue via profit-sharing arrangement
- Extended credit terms
- Improve financial health of supply chain
- No borrowing and no security required
What’s in it for the supplier?
- Improve cash flow
- Access early payment on demand
- Eliminates paperwork and contracts
- Non-recourse, non-debt cash payments
Supply Chain Finance Hits News Headlines
It all started when some major companies were accused of extending their payment terms, sometimes up to 90 days and then offering early payment for a discount. This led to small suppliers being pressured into signing up to SCF when it may not be to their benefit. The likes of CIMIC, Telstra and Rio Tinto are just some of the major companies making headlines.
Essentially it appeared that some larger corporations were in effect “weaponising” SCF as a means of pressuring their Suppliers to either accept payments at a discount or being forced to wait unacceptably long periods of time, which isn’t what the SCF facility was intended for.
The critics main concerns:
- SCF is often deliberately used by companies to artificially improve cash flow2
- SCF is being used to force suppliers, particularly small businesses, to choose between waiting unacceptably long periods of time before they are paid, and accepting payment at a discount.2
The ASBFEO Responds
These findings were promptly responded to by the ASBFEO, Kate Carnell, who launched a review into SCF in October 2019, consulting with SCF financiers, large companies, and small suppliers. The AFR released the ASBFEO’s Position Paper as supply chain financiers became “threatened with regulation”, and the ASBFEO mentioned companies that have been abusing the scheme.
There were comments for and against SCF as the ASBFEO stated “SCF is a legitimate and effective tool to free-up cash flow for small and family businesses. We have spoken to small businesses that have used SCF to great effect to reinvest in their business and scale rapidly”. This is of course when SCF is utilised correctly and not when smaller contractors are forced to choose between waiting unacceptably long periods of time before they are paid, and accepting payment at a discount.
A final position paper will be released by the end of March 2020.
Concern Grows for The ACCC
The Australian Competition and Consumer Commission (ACCC) have also been involved in the investigation and are currently examining allegations about the payment terms of a selection of companies, and whether or not they are abiding by Australia’s competition and consumer laws. The investigation includes whether the payment terms of the companies are unfair or involve misleading conduct.
A spokeswoman from ACCC said to the AFR “We are concerned where small businesses may feel they have little bargaining power when dealing with large customers, and that they must accept payment arrangements even where more favourable terms have previously been agreed.”2
Pressure Builds for Companies “Abusing” Supply Chain Finance
Some of the large companies reported to have been “abusing” SCF have subsequently dismantled their SCF programs in response to media & political pressure. Furthermore, these companies have now offered 20-day terms to some suppliers.3
Where to Next?
SCF is a powerful financial tool used to fund growth and investment, however it needs to be used responsibly by large companies, so that small businesses don’t suffer. The supplier should be in control the whole time and maintain flexibility to suit their business needs and funding requirements.
Being one of the few financial options small businesses can access without taking on debt is what makes SCF an attractive facility for many businesses in Australia and around the whole.
For more information on SCF please contact your Ledge Finance Executive directly, or contact our offices here.
Please note: this article is purely an information piece of which has been written using trusted new sources such as, The Australian, Australian Financial Review, Australian Small Business and Family Enterprise Ombudsman, etc.