The misuse of supply chain finance (SCF) is “isolated and uncommon”, a group of influential industry bodies has said, following concerns from consumer watchdogs that such programmes can lead to supplier exploitation and an increased risk of default.
SCF programmes are generally defined as arrangements where a bank or financial intermediary offers a corporate’s suppliers early payment on their invoices, while letting that corporate keep their original payment terms or even extended them.
Supporters of such programmes say they help buyers maximise working capital while ensuring suppliers are paid on time, but the area has caught the eye of authorities in recent years.
Notably, Australia’s small businesses ombudsman issued a report this year claiming some corporates and SCF providers were forcing the technique on their suppliers in order to extend payment terms or to extract maximum returns, even from companies in distress.
“Misuse of payables finance and reports of suppliers being forced into accepting unfavourable terms are extremely worrying,” says a new paper by the Global Supply Chain Finance Forum (GSCFF).
“Yet our understanding is that these incidents remain isolated and uncommon. We believe that, while they have attracted significant media coverage, they are not representative of how payables finance programmes are used by the majority of buyers and sellers in mutually supportive supply chains.”
The forum comprises several influential industry groups involved in supplier finance. Its members are the Bankers’ Association for Finance and Trade (Baft), FCI, the International Chamber of Commerce (ICC), the International Trade & Forfaiting Association (ITFA) and the Euro Banking Association (EBA).
“If correctly implemented, it is clear that payables finance is a means for buyers and sellers to optimise their working capital and strengthen their relationships with each other,” the paper says. “It is our goal to ensure that this is correctly implemented across all industries and geographies.”
One flashpoint around SCF has been the amount of time a buyer has to pay invoices issued by its suppliers.
In the Australian case, the ombudsman said some buyers were using finance programmes as a way of artificially extending the time until a supplier is paid, in some cases by months at a time, and has urged providers of SCF to refuse business from buyers that offer terms longer than 30 days.
It also cited cases where suppliers were pressured into signing up for programmes that may not have been in their best interest.
The forum says such reports are “highly concerning”, but that they are not representative of the product as a whole, and should not be used as the basis for restrictions on the provision of SCF.
“Companies should have the freedom to determine their own trade terms and their own means of financing,” says Peter Mulroy, FCI secretary general and a member of the forum.
“There are some buyers who have exhibited more aggressive behaviour, for instance by going beyond the normal industry terms, but it’s the outliers that are causing this negative view and casting a shadow over a product that has been extremely important for the provision of capital to SMEs,” he tells GTR.
Christian Hausherr, GSCFF chair and European head of payables finance at Deutsche Bank, adds that providers of SCF typically have little control over the terms offered by buyers to their suppliers.
“It is totally contained within the relationship between the buyer and seller,” he tells GTR. “What you can do, however, is promote good principles and best practice, and the decision for a supplier to join or not should be totally free.
“It cannot be the role of the bank to provide advice to a client on what an appropriate payment term is, but if banks observe questionable practices, they can go back to the buyer and say it’s in their own interest to discuss that with their accountants.”
The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) has welcomed action taken by Greensill, a London-headquartered provider of SCF, to “issue discontinuance notices to its supply chain finance clients who fail to comply with 30-day payment terms”.
“There is no reason why other supply chain finance providers can’t do the same,” says ombudsman Kate Carnell.
Greensill‘s founder and chief executive, Lex Greensill, says the company is “delighted that the ASBFEO has welcomed our action to protect small businesses”. “Small businesses are the backbone of the Australian economy and must be treated fairly,” he adds.
Rising demand: Covid-19 and SCF
According to reports by providers of SCF, the Covid-19 pandemic has prompted a significant uptick in demand from both buyers — struggling with a squeeze on liquidity — and their suppliers.
The GSCFF acknowledges that the impact of the virus prompted some buyers to extend terms beyond the norm, but says those are “short-term reactions” to an unprecedented situation and should not continue in the longer term.
It also dismisses suggestions from ratings agencies that concerns over liquidity could prompt banks and other investors to withdraw financing from SCF programmes.
“I would say it’s been the opposite,” Hauscherr says. “Banks have done anything and everything to support the economy, whether it be buyers or SMEs, and governments have provided capital to the banks – in this context, payables finance programmes are perfect.”
A secondary concern raised by those agencies is that firms that have not typically used SCF programmes could begin doing so simply to offset financial difficulties.
Those fears stem in part from historic collapses of high-profile companies, including UK construction giant Carillion and Spain’s Abengoa, where programmes were used to mask financial distress.
Hauscherr says those incidents should be viewed as outliers, and that the credit risk is no greater with SCF programmes than other forms of financing.
“Behind each payables finance programme there is a credit facility, and for each credit facility – before it is granted – you have credit experts who are able to read a balance sheet and decide for what kind of amount, or what kind of credit facility, a buyer is good,” he says.
“The beauty in this case is not only do you have that credit facility in the background, and the irrevocable payment undertaking the provider will have from the buyer, but also the assigned receivable from the seller which gives additional security.”
Discussions are ongoing at standards-setting bodies over whether corporates should be required to disclose SCF programmes as part of their financial statements.
Further detail is expected later in the year from the Financial Accounting Standards Board (FASB) and the International Financial Reporting Standards (IFRS) Foundation.
Though ratings agencies had initially pushed for disclosure of such arrangements as bank-like debt, it now appears more likely either that disclosure will be required only in notes as a potential liquidity risk, or that current practices will be deemed sufficient.
“We all believe in being as transparent as possible; the question really is how you do it,” Stacey Facter, senior vice-president for trade products at Baft, tells GTR.
“The idea of putting something in the notes of financial statements makes sense, but I think the FASB and IFRS are still grappling with what that would look like. It’s not a simple answer.
“There are issues around being able to talk about who you’re borrowing from, who you’re getting a trade payable from, how much those are worth, and so on.”