Carillion: 120-day terms only a technicality

Carillion’s group corporate affairs director John Denning has told CM the company feels “aggrieved” at negative coverage of a new scheme that gives suppliers access to their money 20 days earlier than the contract states at no extra expense, or as early as the day after the invoice is approved if they pay an interest charge.

Overall, it says that no supplier will be worse off under its “Early Payment Facility”, and indeed signing up to the scheme in the first place is voluntary.

So far, 120 companies have taken up the option, and another 50 have requested the paperwork. “The reaction from suppliers has been very positive, they’ve been taking it up avidly,” Denning said.

Carillion’s scheme was launched last October following the government’s call for new measures to help free up finance for SMEs, which have been finding that conventional bank overdrafts and loans are often impossible to secure. 

It is being offered by RBS, and is a form of “reverse factoring”. RBS advances the money to the suppliers once the invoice is approved, with Carillion then paying the funds to the bank at a later date.

For providing this facility, RBS charges interest at 2% of the sum, divided by 365 and multiplied by the number of days in advance the payment is made. Carillion’s contracts have a variety of payment terms, ranging from payment in advance to 65 days after approval.

If the supplier opts to receive payment up to 20 days earlier than the timescale set out in the contract, for example at Day 45 rather than Day 65, then Carillion refunds the charge to the supplier. This happens instantaneously – the sum released by RBS is in fact the sum plus the advance charge. 

If, however, the supplier wants to access the funds more than 20 days early, it would bear the interest charge for the extra days. “We don’t think it’s unreasonable for them to pay if they want the money on Day 10 rather than Day 45,” Denning said.

But one aspect of the scheme that has proved controversial is that Carillion is also asking suppliers to sign up to 120-day “standard” payment terms.

However, Denning said that the 120-day limit is in fact a legal technicality of reverse factoring, as suppliers will remain on their existing contractual terms.

“It defines the period within which Carillion has to pay the bank, and so it gives us more flexibility to have our working capital for longer. If we hadn’t introduced something to give us more flexibility then there would be no benefit to us in the scheme, just costs.”

Denning said that similar systems have been available in other sectors for around 10 years, and that Citibank and Santander are also active in this area. Balfour Beatty is believed to be looking at a similar scheme.

Denning admitted that the scheme is “opaque”, but said: “We feel a bit aggrieved – we were trying to help when the government is asking for help. It’s not suitable for everyone but we’re offering it and saying ‘would you like to try it’. If they don’t like it, they’re on their normal terms.”

“But if you’re a supplier having trouble borrowing from the bank, then you have the ability to get access to cash at roughly a 2% interest charge. The SME is borrowing against Carillion’s [borrowing] covenant to get money cheaply if they want it.”

www.carillionplc.com/carillion-payment-terms.aspx