What is Supply Chain Finance?
We take a look at why Minister David Cameron is backing supply chain finance as a “new” form of finance for small- and medium-sized businesses
Supply Chain Finance has been in the news recently. Prime Minister David Cameron is backing supply chain finance as a “new” form of finance for small- and medium-sized businesses. He claims that, “…this scheme will not only help them [small businesses] secure finance and support cash flow, but will help secure supply chains for some of our biggest companies and protect thousands of jobs.”
If you are a small business who supplies a large, probably well known company, you will know better than most that just because they are reputable does not mean they are on time with paying their invoices. In fact, it can often make them worse as they know they have the power to do what they want and pay invoices later and later. This is where supply chain finance is meant to fill the gap.
Before we dive into Supply Chain Finance
Invoice finance facilities can be taken up to advance as cash value percentage of the invoice to the supplying business before the company has been paid, meaning the credit terms given to the company are no longer an issue for the suppliers cashflow.
Traditionally, the cash amount advanced through invoice finance is around 80-90% depending on the suppliers own credit rating and the likelihood of the suppliers client being able to pay on time (or be able to pay at all). With supply chain finance, the suppliers’ client is a large, reputable company, which appears to bring a few advantages over the traditional invoice finance facility.
What does Supply Chain Finance offer?
Supply chain finance has the advantage over invoice finance because the company which is required to pay the invoice is trusted. The bank involved in advancing the payment knows for almost certain that the money will eventually reach the supplying business from the large company. This means that there is little risk for the lender in advancing the value of the invoice to the small business as it is a sure bet the money will be repaid.
As a result of this, supply chain finance offers:
- Increased chance to secure finance if the supplier has the support of a large company supporting the scheme.
- A 100% invoice value advance instead of the 80-90% that invoice finance usually offers.
- Cheaper borrowing rates for the supplier who has the cash advanced compared to usual invoice finance facilities.
If we dig a little deeper into the scheme, there are some major limitations
Supply chain finance is limited to only suppliers who are providing a service to companies who are supporting the scheme. This excludes the majority of small businesses! Here is the actual list of companies supporting the scheme.
“The following companies have agreed to this commitment: AB Foods; ASDA; Atos; Babcock International; BAE Systems; Balfour Beatty; Boeing; BP; British Airways; BT; Capgemini; Carillion; Centrica; Dell; Diageo; EDF Energy; Finmeccanica; General Dynamics UK; GKN; GSK; Home Retail Group; HP; IBM; J Sainsbury; Jaguar Land Rover; Kingfisher; Lockheed Martin UK; Marks & Spencer; MBDA; O2; Rolls-Royce; Serco; Siemens; Statoil; Tata Steel in Europe; Tesco; Thales; Vodafone.” – number10.gov.uk
Beyond this, Simon Carter, Director at Touch Financial highlights that there needs to be a strong relationship between the customer and supplier for this scheme to work.
“It [supply chain finance] only works where the customer/supplier relationship is strong, supportive and ongoing, and it only works when the credit controls within the supplier business are suitably robust.”
If your business does not have an established credit control facility you will be in for a complicated ride as you spend more time and money on admin to try and ensure the process runs smoothly. If the business/large company relationship is not up to scratch, this will get messy, fast.
A further and perhaps the most significant problem is that the large companies involved may use their power to demand longer credit terms which will obviously result in higher costs for the supplying business; the longer the money is advanced to the small business for, the longer the interest has to accumulate.
In some cases, Supply Chain Finance is something which may benefit you more than an overdraft or even some of the traditional invoice finance facilities available, if you have a good relationship with one of the involved large companies. However, this government pushed initiative is severely limited to a select few businesses. The fact there are only about 38 large companies currently involved strongly suggests it really isn’t as big of a deal for small and medium sized businesses as the government are making it out to be. This makes you questions the motives behind the scheme.
With Cameron conveniently sitting side-by-side with popular brands whilst also being seen to support small businesses, supply chain finance could be viewed as a win for everyone, as David Cameron himself describes. However, with the high possibility of large companies taking advantage of small businesses by demanding longer credit terms (meaning more interest to pay) and the huge limitation on those who can benefit from the scheme, it may not be as great of a deal to UK businesses as first thought.
So, if you are in the unlikely position of being able to secure supply chain finance, it may be worth checking out in more detail as it will help you secure a finance deal with a higher advance level than normal invoice finance, although be aware of the power your customer will have over you. Otherwise, you will most likely benefit from similar products to supply chain finance, such as invoice discounting, factoring or spot factoring which are all proven methods for finance for small and medium sized businesses.
The new supply chain finance scheme – is it just another way for the government to appear supportive of small businesses whilst also being connected to popular major brands?
“What is Supply Chain Finance?” business advice article by Graham Tripp of Touch Financial