Promising news for SMEs this week: supply chain financing provider Greensill has given late-paying companies formal notice that it will ditch them if they continue to extend their payment terms beyond 30 days.
This is good news for SMEs because cash flow problems - which are often caused by, or exacerbated by, late payments - are one of the biggest reasons for small businesses failing.
So what exactly has happened?
Well, back in February, supply chain financing (SCF) provider Greensill informed all Australian clients that they must not push out payment terms to SME suppliers beyond 30 days.
The multi-billion-dollar company, founded by Bundaberg-born, London-based financier Lex Greensill, says virtually all of its clients in Australia have complied (keyword: “virtually”, but more on that soon).
“Greensill has allowed a period for the remaining clients to complete their internal reviews stemming from our request,” a Greensill statement says.
“We have given formal notice to those clients that their SCF facilities will be discontinued unless they ensure that they do not use our SCF facilities to push out payment terms to SME suppliers beyond 30 days.”
So, who’s still holding out?
Australian Small Business and Family Enterprise Ombudsman Kate Carnell has the answer on that one.
She says it’s clear Greensill’s statement is in relation to its dealings with contractor UGL, owned by construction firm CIMIC - Australia's biggest construction company.
“UGL has reportedly extended its payment terms to its small business suppliers to 65 days from the end of [the] month the invoice is lodged, offering supply chain finance to those that want to be paid earlier and are willing to take a discount on the invoiced amount,” Ms Carnell explains.
“This is an example of clear misuse of supply chain finance as outlined in our recently released Supply Chain Financing Review. Practices such as this are harmful to small businesses, especially in the current challenging environment.”
The promising news is that according to the AFR, CIMIC has now put its controversial SCF scheme "under review".
So what exactly is supply chain financing?
SCF, also known as supplier finance or reverse factoring, can free up cash flow for both the SME business that sends the invoice to be paid, and the company that owes the money.
It does this by the SCF provider acting as a facilitator between the two.
Here’s a quick example: let’s say Big Business Inc (buyer) orders some machine parts from Little Joe Traders (supplier).
Little Joe then sends the invoice to Big Business Inc, which approves the invoice and confirms that it will pay the SCF provider for the invoice at the invoice’s maturity.
Little Joe then has two options: 1) Patiently wait for the invoice’s payment terms to be met and paid in full; or 2) Get paid earlier by the SCF provider, but at a discounted rate.
Often Little Joe’s decision will depend on his cash flow requirements at the time.
So what’s the problem?
Normally nothing. When done right “it’s an excellent concept for both buyer and seller”, says Clive Isenberg, chief executive of Octet, which specialises in supply chain financing for smaller companies.
But the risk, as Mr Isenberg points out, is that if your business is supplying the big end of town, you can become overly reliant on them and have to play by their rules.
“You are being constantly pressurised to follow the way they’re going. You’ve got to agree to their payment terms," he told the AFR.
Need a cash flow solution for your business?
As you’re well aware, business cash flow solutions aren’t exclusively for the big end of town.
There are plenty of products that cater to SMEs’ many different needs.
So if you’d like to explore some of the options available to your business, then please get in touch - we’re happy to run you through them.
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