So David Cameron
met with some of the country's largest companies this week and urged them to
support their smaller company suppliers by engaging in Supply Chain Finance. The scheme uses the creditworthiness of the big
company customer to allow the smaller supplier to obtain funding at lower cost
secured against invoices that have been approved for payment. It's often called reverse factoring, and one
of the biggest advantages is that - since the buyer has confirmed approval of
the invoice - there is no recourse.
The downside is
that there are significant IT and administrative costs and it will only work in
circumstances where the customer/supplier relationship is ongoing with regular
transactions. Perhaps the bigger risk is
that large customers will be able to dictate longer payment terms justified on
the basis that they have an arrangement whereby the SME can be paid faster. But that, of course, will cost the SME
interest which flies in the face of the culture we want to see, where payment
terms are set fairly, and adhered to, in a climate where paying on time is the
norm rather than the exception.
I'm not as
scathing as some commentators about the scheme - there are circumstances where
it is a great solution and can work really well – but it certainly isn't a
panacea, and nor a one-size-fits-all solution. I'd like to think that, while our Prime
Minister had these business leaders in the room, he also asked those who hadn't
signed up to the Prompt Payment Code why they hadn't done so. In a week when Sainsbury's is being lambasted
for extending payment terms for non-food suppliers to 75 days, we need to be
encouraging good practice that enables SMEs to have certainty about payment
expectations. Supply Chain Finance has
its place but there's no substitute for agreeing fair payment terms and
sticking to them. We need more
businesses to lead by example, and we need our leaders to put pressure on them
to do so.
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