Supply chain finance initiatives may have unintended consequences
One of Australia’s leading funders of SMEs has warned that small businesses might face unintended consequences from the efforts to shut unfair supply chain finance programmes.
After recent media attention and pressure from the office of the Australian Small Business and Family Enterprise Ombudsman, some of Australia’s largest companies are moving away from their early payment supply chain finance programmes.
Scottish Pacific senior executive Wayne Smith said the Ombudsman was rightly trying to ensure SMEs are not put at a disadvantage by big business.
“We applaud the efforts of ASBFEO to protect the interests of small business owners, and to encourage large corporations to end programs that stretch out payment times for SMEs in order for them to secure early payment discounts.
“The catch-22 in shutting down these programs is that, while in the long-term this may help the SME sector, in the short term essentially SMEs have had a funding option taken away from them.
Many SMEs have become dependent on early payment programmes
“Many small business suppliers have developed a dependency on the operating rhythm provided by these programs and in the absence of a comprehensive phase-out period their businesses are now potentially being forced into a less certain cash cycle.”
SME Growth Index research shows twice as many SMEs are reporting significantly worse cashflow as the previous year, and more than a quarter of small businesses say their cashflow problems make it difficult to meet their tax payments on time.
“Cashflow is already a huge issue for Australia’s SME sector, so small businesses coming off these early payment schemes will need to find new ways to ensure they have adequate cashflow,” he said.
Mr Smith said debtor finance is one funding option that can help those businesses coming off cancelled early payment programs because it is a style of funding that helps with cashflow management.
Debtor finance allows businesses to unlock the working capital tied up in outstanding sales invoices across all their customers. With debtor finance the facility is ‘always on’ as opposed to supply chain finance and early payment programmes which may only provide funding during ‘discount windows’.
He said early payment programmes should operate to help SMEs, not to squeeze them into taking a pay cut in exchange for prompt payment. Done correctly, they provide an effective way for SMEs to access low cost funding without providing property security.
“These programmes should be designed to be a ‘win-win’ for buyers and suppliers, not as a means to push out supplier payment terms from existing supplier arrangements,” Mr Smith said.
“The danger is when larger corporations are able to use these programmes to their benefit to extend payment terms, with a negative impact on ‘the little guy’. That essentially puts a gun to their head to choose between cashflow at a discount or extended periods without cashflow.”
