A coalition of influential industry associations has launched an impassioned defence of supply chain finance, following increased scrutiny from officials and accompanying “controversial” press coverage.
The Global Supply Chain Finance Forum (GSCFF) says critics of payables finance say the practice “might open the door to many disputes and even frauds. Of course, we do not share the same view.”
It made the remarks alongside a paper setting out the potential benefits of payables financing for both buyers and suppliers. Established in 2014, GSCFF members are the Bankers Association for Finance and Trade (BAFT), Factors Chain International (FCI), the International Chamber of Commerce (ICC), the International Trade and Forfaiting Association (ITFA) and the Euro Banking Association (EBA).
Supply chain finance programmes generally allow suppliers to receive funds early – at a discount – from a financial intermediary, while for buyers they can help free up working capital by extending the amount of time until they have to pay.
The GSCFF says these programmes often act as a lower-cost source of funding for suppliers as finance is raised against the credit rating of the buyer, often a large corporate. The buyer can also benefit from greater supply chain stability and automation, it says.
“In spite of these obvious benefits, payables finance has received controversial press in recent times, particularly following the collapse of certain companies that have misused it, and such misuses are of significant concern for the industry,” the paper says.
Accusations of wrongdoing are generally grouped into two categories: unethical conduct by corporates towards their suppliers or misleading accounting practices that obscure a company’s financial health.
In Australia, large corporates have been accused by the country’s small business ombudsman of arbitrarily extending their payment terms in a move to pressure suppliers into taking up financing programmes.
The authority is suggesting government intervention may be required to address unacceptable behaviour, which includes “bullying” smaller firms into signing up to supply chain finance arrangements that are not in their interest, and has already prompted two high-profile firms to scale back their existing programmes.
An anonymous sub-contractor in a major construction project told the Australian Financial Review this week he had been forced by CIMIC subsidiary Broad Construction to sign a supply chain finance agreement with fintech giant Greensill, despite requesting direct payment on standard 30-day terms.
Greensill says its programmes are voluntary and insisted in January it considers firms pressuring suppliers to be “abusers of its core business”.
The GSCFF paper acknowledges such practices exist but says they are far from commonplace, stating: “While the examples of misuse of payables finance to force a supplier into accepting uncommercial payments terms are few, they are nevertheless very worrying.
“While such cases have been prominently highlighted in the media, they are not representative of how payables finance programs are used by the majority of buyers and sellers in mutually supportive supply chains.”
The GSCFF also acknowledges the collapse of UK construction giant Carillion in 2018 and the bankruptcy of Spanish infrastructure firm Abengoa in 2015. The duo have long been accused of using supply chain finance programmes as an accounting trick, in effect to disguise the scale of funds owed.
In Abengoa’s case, the incident prompted ratings agency Moody’s to call for an overhaul of accounting practices. It suggested at the time payables finance programmes should be disclosed as bank-like debt, though the forum notes it has “taken a more nuanced and balanced view” since then.
More recently, US authorities have supported proposals that firms should be required to disclose the use of supply chain finance in some capacity – albeit not necessarily as debt – in order to improve transparency.
“Because of questionable practices by a few identifying certain transactions as supply chain finance rather than loans, the accounting treatment of trade payables is under increased scrutiny,” the paper says.
“Trade payables by nature are short term. If a buyer borrows to settle its trade payables, this will be reflected as bank debt. However, if the same buyer develops a payables finance programme for its suppliers, the trade payables may remain as trade payables on its balance sheet if certain criteria are met.”
Those criteria include avoiding triparty agreements, ensuring fees are fully paid by the supplier to the finance provider, and preventing payment terms from changing after a programme is established.
It also suggests financing conditions “should be exclusively negotiated between the finance provider and the supplier without any intervention from the buyer”.
The GSCFF says it plans to build on a set of standard definitions it established in 2016 and publish an individual report specific to payables finance later this quarter.