The Forum of Private Business, which represents SMEs across the economy, has raised concerns that companies at the top of the supply chain are using the government’s Supply Chain Finance initiative as a shield for failing to improve payment practices.
In an initiative launched last October, the government asked client organisations, including Carillion, Balfour Beatty, British Airways, Tesco, Asda, J Sainsbury, Serco and Kingfisher, to commit to offering their supply chains improved access to finance, given that conventional overdrafts and short-term loans are now much less available.
Supply Chain Finance, also known as supplier finance or reverse factoring, allows suppliers or subcontractors to present their invoices to banks for payment ahead of the due date. The bank then charges an interest rate based on the number of days in advance of the contract date the money is drawn down, and the end-client then pays the money to the bank at a later date.
The mechanism could help an SME supplier deal with a bulge in its outgoings when its cash account is low, for instance to buy new stock.
Carillion’s new Early Payment Facility is an example, although in its case SMEs in the supply chain are only charged if they want to access the funds more than 20 days early.
But a FPB spokesman said there was evidence in other sectors, principally supermarkets and retailers, that clients see the Supply Chain Finance facility as an alternative to good payment practice or an opportunity to squeeze cash from their supply chain, rather than an additional facility to free up finance for suppliers.
The spokesman said: “Big business could use it as a way to increase payment terms to suppliers. We have seen several examples of supply chain abuse come to light since last October, when Sainsbury’s extended its payment terms, and the most recent case was Selfridges.”
The FPB is also concerned about the spread of invoice discounting, where suppliers give up 1-5% per cent of the invoice value in return for being paid early. “Clients extend the payment terms, then tell the supplier they have to take a discount if they want to be in the same position they were last month,” the spokesperson said.
The practice formed part of the FPB’s evidence to a cross-party committee of MPs, chaired by Labour’s Debbie Abrahams, who held an inquiry into late payment at the end of last month.
CM asked Balfour Beatty to clarify its position on offering Supply Chain Finance, but the company declined to comment.
Meanwhile, the National Specialist Contractors Council has written to the government to protest that Carillion’s Early Payment Facility terms are unfair. Carillion said the NSCC had not been in touch to find out how it worked, and that several suppliers had written positive statements about it.
