Supply Chain Finance also known as Reverse Factoring
It provides suppliers with immediate cash on invoices and the buyer gets the goods for a period of time before having to pay for them as the payment terms on the invoice remains unchanged or in some cases, even extended.
Major UK companies generally have strong credit ratings and greater access to finance. Contrasting with the SME suppliers to those companies, where access to finance is likely to be more expensive or less flexible.
This funding is based on the credit quality of the buyer and their ability to repay and often backed by credit insurance.
Third parties, traditionally banks and now also independent intermediaries backed by investors, are providing the funding in the market.
How it works:
- A supplier sells goods on credit terms to a buyer
- The buyer confirms the invoice is approved to a lender and this then can be drawn upon by the supplier.
- The lender pays the supplier 100% minus a small transaction fee or discount.
- On the due date the buyer pays the lender what they would have paid the supplier.
- The lender takes the discount as their fees.
- Paid earlier
- Higher advance rate
- Cheaper than own sources of funding
- Improves cashflow
- Ability for growth
- Obtains good well ahead of payment
- No use of own cash of facilities
- Provides stability in supply chain
- Enhances relationships with suppliers
Carillion, the building contractor, in its final year of business, extended its standard payment terms to 120 days and encouraged suppliers to use its bank-financed Early Payment Scheme. The result was that Carillion built up £500m of debt that wasn’t counted as debt but as other creditors in the Balance Sheet.
For Greensill, they took it a step further and packaged supplier bills into bond-like instruments, which typically had maturities of up to 90 days, which were then sold to investors, allowing Greensill to make new loans.
However a number of events; Credit insurance cover being withdrawn and Greensill’s primary funder Credit Suisse taking action and freezing funds that held most of their $10 billion in assets in Greensill notes over concerns about being able to accurately value them, caused the business to enter administration last month.
The British Business Bank (BBB) had also removed a taxpayer guarantee following an investigation into the UK-based fintech company’s compliance with the rules of the Coronavirus Large Business Interruption Loan Scheme (CLBILS).
For their clients, the inability of Greensill to continue funding them may mean having to repay debts sooner and finding alternative sources of financing in the near term, an issue for its higher-risk clients, which may struggle to raise funds elsewhere or have to pay much more for the financing. Most notably GFG Alliance, ultimate owner of Liberty Steel is one of their larger clients.
This is not helped by the political lobbying storm involving previous and current government ministers.
These widely reported issues may undermine confidence in the supply chain market, however the issues seen are not necessarily relating to the product itself but how it is used by the buyer and funder beyond the scope of the scheme.
There are many providers of supplier finance for both the domestic market as well as those trading overseas. These provide flexible solutions to improve working capital for SMEs and are an effective flexible funding option.
We can assist in helping your business to understand the options available and in sourcing the right one for your business.
For more information on how we can help please contact us at